Woolworths (WOW) announced a strategic review of its Dick Smith Electronics (DSE) stores in November last year and posted the results this morning alongside its latest sales figures (up 5.6% in the last half of 2011).
The review’s main conclusion was that DSE did not fit the mold of “high volume…market-leading” position, the latter a case of fierce competition with market leader JB Hifi (JBH), the former possibly a result of the structural change going on in discretionary retail.
- Consumer electronics will remain an important category for Woolworths and is better delivered through BIG W and its expanding multichannel offer.
- The investment and management attention given to Dick Smith have been disproportionate relative to its position within the Woolworths group. The company’s current focus is on accelerating growth in its core trading divisions;
- Following further restructure, Dick Smith will be divested as a going concern to an appropriate buyer and will continue to operate as normal.
On the back of this news, JBH is up over 4% and Woolworths is up 1.6%
A takeover of DSE by JBH is a possibility, as I said last night on ABC’s The Business, the latter’s business maturity profile has effectively completed, and that transaction would add to its brace of stores across the country. Merging the two styles and brand images is another matter, given the focus on high-volume and low costs of JBH’s outlets and its impressive infrastructure and distribution systems.
Of course this is just speculation, as other suitors may purchase the entire franchise to “bolt on” to their existing profiles, for example Harvey Norman (HVN), and Woolworths have stated they have received a number of “unsolicited approaches”.
The bottom line cost to Woolworths for divesting DSE will be a one off cost of $300 million, including the closure up to 100 stores within the next 2 years. When Woolworths reports later in February, it will interesting to see if further deterioration in underlying profitability of DSE have sparked this sell off, and for investors it may answer the question if big-box/bricks and mortar traditional retailers can survive in an high AUD, online retailing environment.