Day Trading After-Market Lounge 20th April, page-78

Hey @zero2a$mill
Hope you are well. The reason that I'm not posting much, and won't be in the future, is that I have a job now. Have talked about it before, but in case you missed it, I'm doing some work for an Aged Care group, visiting/helping people over 65 with some low-level care in their homes (cleaning, washing, shopping etc). Just finished my first week and enjoying it. You never know, I might be knocking on your door (or @Endless) and offering to wash your back

I'll see if I can find the Omm post ....

From a trading point of view, I can't sit in front of the computer all day any more, if at all during trading hours, so am now a ST person, which I always wanted to be anyway. I have to now set targets and stops, then monitor. All good. Had a nice sell on PDI recently. Bought EXM and ADN on their lows. I will miss all the daily runners like XTV etc, but that doesn't bother me.

This isn't new, but I recently re-read it:

"This is a great explanation of what happened with Dick Smith. It starts with a fire sale ...

Why is Dick Smith Electronics closing down and why are it's 3,300 employees now out of work? Let's run through a very simple timeline of events in plain English.

1. In 2012 Anchorage Capital, a private equity group, purchased Dick Smith from Woolworths for $115 million.
2. Anchorage pays $20 million in cash with the balance plus interest to follow.
3. Dick Smith has cash reserves of $12.6 million so Anchorage has effectively paid only $7.4 million.
4. On 26 November 2012, Dick Smith had inventory that was valued at $371m but Anchorage now wrote the value down by $58 million.
5. In 2013 Dick Smith had EOFY clearance sales where the stock was sold off. The clearance sales saw $200 million of stock sold for $140 million (the operating cash flow) but due to the write downs $7 million was profit. Dick Smith did not restock the inventory so the $140 million was now classed as profit.
6. Anchorage uses $117 million of the "profit" to pay Woolworths the balance of the purchase plus interest and uses the rest to open 15 new stores and take over the electronics departments of David Jones to maximise the company?s initial public offering (IPO) valuation.
7. Anchorage now has a company with little inventory, huge sales growth and big profits. The books look amazing and Anchorage now forecasts a huge profit for 2014 and the business is floated on the stock market at $2.20 a share which brings in $520 million.
8. Anchorage sold the last of the shares in late 2014 and walked away with a $500 million return for their $10 million investment two years earlier.
9. The new shareholders were now footing the bill for repurchasing inventory. This should have resulted in a poor operating cash flow, but most of the repurchasing was funded by suppliers. Come the end of the 2015 financial year, the operating cash flow was negative $4 million and the suppliers were demanding payment.
10. The shareholders are now forced to take out a $71 million loan to finance purchases while sales and profit margins are sinking. Now owing $150 million Dick Smith goes into administration.
11. In 2016 the stores are closing down and 3,300 employees are looking for new jobs.

Economist Jason Murphy said Anchorage had used a perfectly legal accounting manoeuvre to write down the value of its inventory, raise profits through a national fire sale, neglect to restock shelves and open a massive number of new stores to maximise the company's IPO valuation. It's what private equity firms do, and why some people live in $12 million harbour-front mansions, while others scratch their heads wondering what just happened.

It's just an example of how capitalism works!"

So, what takeaway messages are there in this saga for me?
1 - capitalism is about making money
2 - morality is not necessarily part of the equation.
3 - despite having started/owned a retail store for 15 years, there's no way I would have seen this coming for DSH. Only a forensic auditor would have spotted this before the deal went down.
4 - there are many people far far smarter than me when it comes to making a profit.
5 - retail punters like me are like corks bobbing in the ocean. I might like to think I understand what is going on in a listed company, but I am usually just guessing. To think that I fully understand the machinations of a company of which I'm not involved is just egotism on my part.
6 - never become a "true believer" in any stock - if it's starting to look bad, get the hell out of there
7 - everyone is a genius in hindsight