Analysts suggest Dick Smith should close 190 stores as pressure weighs on retail

Woolworths should consolidate its Dick Smith electronics chain into its existing Big W network, an analyst says, after a report called for the retail giant to close more than half the brand’s stores in favour of boosting Dick Smith’s online presence.

The report, written by CSLA analysts David Thomas and Richard Barwick and entitled Off With Dick’s Head, suggests Woolworths should close 189 of the chain’s 386 stores.

The CSLA report says the stores should be closed given Dick Smith is generating such a small return for Woolworths, posting $22 million in EBITDA in 2010-11.

“This is virtually irrelevant in the context of group EBIT north of $3 billion,” the report states.

It also notes Woolworths does not have time or money to make the chain into a key player, given it’s focusing on competing with Coles and the rollout of Masters.

Other analysts agree. Peter Esho, chief market analyst at City Index Asia Pacific, says it would make sense for Woolworths to consolidate the Dick Smith chain into its Big W network of stores.

“If you look at the footprint, there is a lot of overlap between Dick Smith and Big W, and we think it makes strategic sense to enhance them,” he says.

“We think it makes strategic sense to utilise the space there, and that would drive more traffic into Big W.”

Woolworths was contacted this morning, but a reply was not provided prior to publication.

The analysts say the recommendations could almost double Dick Smith’s profitability in the short term to $40 million, adding that a Woolworths divestment of the entire asset was unlikely in the current market due to expected difficulties in finding a buyer.

The report also notes that Woolworths would be reluctant to spend more money on Dick Smith. Esho says given the company is lagging market leader JB Hi-Fi, it makes more sense to integrate it with an existing business.

“It’s dominant, but it’s certainly not the most dominant player. The current position doesn’t really justify having a separate chain for electronics and Big W,” he said, also noting that Dick Smith’s online capabilities could integrate well with Big W.

“If you’ve got a competitive Big W with a well-defined consumer electronics strategy, it gives you the ability to try something else. For now, [rival discount department store] Kmart is just going to chip away on price in the consumer electronics market.”

The Dick Smith chain has been owned by Woolworths since the early 1980s, and started growing in 2001 after acquiring the Tandy chain of companies. It closed 320 stores in Australia, but the CLSA report still says there is a “massive gap” between the company and the next biggest thing, JB Hi-Fi.

Esho says moving the chain away into the Big W stores will allow the company to take new risks.

“If you put that chain into the Big W stores, it gives you more freedom to try other things. As of right now, there is no opportunity there.”

The prediction comes during a troubling time for retail. Just last week Speciality Fashion Group announced it may close more than 100 stores due to excessive rents and sluggish sales.

This article originally appeared on SmartCompany.

Photograph by Kieran McGlone