In a report to the company's creditors released yesterday, administrator McGrathNicol recommended that the Dick Smith Group be placed into liquidation and its assets sold to pay back outstanding debts. However, it admitted that there is no expectation that gift card holders will see any money, unless the liquidation process yields surprisingly high returns.
In June 2015 Dick Smith Group had a value on paper of $170 million. It is now estimated that the group will be more than $260 million short when it comes to paying back creditors.
Gift card holders at the back of the line
Dick Smith Group went into voluntary administration in January 2016. At that time there were more than 45,000 gift cards in circulation in Australia and New Zealand, worth about $2.5 million. McGrathNicol declared that gift cards would no longer be redeemable, with card holders having to join the queue of Dick Smith's creditors.
Under Australian law, gift card holders are classed as unsecured creditors and are further down the list of priorities when it comes to settling debts. The secured creditors – including the banks that provided Dick Smith Group with the debt that got it into strife in the first place – are likely to come out behind too, although they will at least receive something.
"The secured banks would receive a partial return on their exposure, but there is little prospect of any return to unsecured creditors," says Joe Hayes of McGrathNicol.
The Dick Smith case should be an object lesson in the risks of using gift cards, says CHOICE spokesperson Tom Godfrey. "This is another reason consumers should be wary of giving gift cards as presents," he says. "Not only do they usually have expiry dates – unlike cash – but if a retailer goes bust before you can spend it that card in your wallet can end up being worth less than the plastic it's made of."
How did it come to this?
Despite posting profits in the 2013–14 and 2014–15 financial years, Dick Smith was a victim of a highly competitive consumer electronics market and a strategy that chased unsustainable growth to maintain market share.
After a successful public listing in 2013, the retailer took on significant debt to fund an aggressive expansion. In two years the business doubled the amount it spent on occupancy and rental costs, loaded itself down with $70.5 million in debt, and took on an extra 71% worth of inventory.
However, the retailer failed to snatch market share from competitors like The Good Guys and JB HiFi, and was stuck with goods it simply couldn't offload.
"These expansion plans went unchecked during early to mid-2015, and major inventory purchasing decisions meant Dick Smith was carrying too much stock that was not saleable and was overvalued," says Hayes. "By December 2015, a rapid clearance sale was needed at a time the business should have been achieving strong margins."
The company went into administration and tried unsuccessfully to find a buyer for the bricks-and-mortar business. 394 stores were shuttered, while Kogan.com bought the online business and intellectual property – including the personal details of customers who neglected to opt out.
The final nail in the coffin will come at the creditors meeting later this month where the company will probably be placed into liquidation.
However, some good news has come out of this sorry story: the administrators have confirmed that Dick Smith Group's more than 3000 employees will be paid their full entitlements.