Indigo Reports Third Quarter Fiscal 2020 Financial Results - Focus on Profitability Drives Net Earnings Growth of 20%

TORONTO, Feb. 6, 2020 /CNW/ - Indigo Books & Music Inc. (TSX: IDG), Canada's largest book, gift and specialty toy retailer reported revenue for the third quarter of $383.7 million.  This compares with revenue of $426.0 million for the same period last year.  The sales decline was the result of a deliberate strategy to pull back on non-margin accretive promotional activities.  The result of this strategic decision was an adjusted EBITDA improvement of 23.1%, excluding IFRS 16.

Commenting on the results, CEO Heather Reisman said: "We are in the early stages of a fundamental repositioning of Indigo – one that will fully build on our customer affection for our brand but that will allow us to thrive in an environment which is totally different from the one we were "born into". We are pleased to see some early positive financial impact but we are fully committed to returning to growth and true profitability and we feel confident about the actions we are and will be taking."

Indigo reported net earnings of $25.8 million ($0.94 basic net earnings per common share) compared to net earnings of $21.5 million ($0.80 basic net earnings per common share) last year. This bottom-line improvement was achieved on a declining sales base through focused efforts to improve margin rates across the business and lower the Company's cost infrastructure. Excluding the impact of IFRS 16, the Company reported an improvement of $8.1 million in adjusted EBITDA for the quarter.

The Company launched a cost-cutting initiative at the beginning of the year targeting $20.0 to $25.0 million in cost savings.  Year-to-date, the Company has been able to reduce operating, selling, general and administrative expenses, and has met the target of $20.0 million. While this reduction has been partly offset by costs associated with non-recurring expenses associated with the move of the Company's proprietary New York design studio to Toronto, it is reflective of the Company's commitment to future profitability.  Additionally, the Company will underspend against its capital expenditure target of $20 million for this year, a significant reduction from prior years. 

Adoption of IFRS 16, Leases

The Company adopted IFRS 16 Leases ("IFRS 16") in the first quarter of fiscal 2020, replacing IAS 17 Leases and related interpretations. IFRS 16 introduced a single lessee accounting model which required substantially all the Company's operating leases to be recorded on the balance sheet as a right-of-use asset and a lease liability, representing the obligation to make future lease payments. The Company implemented the standard on March 31, 2019 using the modified retrospective approach, therefore the Company's 2020 results reflect lease accounting under IFRS 16. Prior year results have not been restated and continue to be reported under IAS 17. When compared to the previous accounting method, this resulted in a material adjustment to the Company's financial statements.  

Analyst/Investor Call

Indigo will host a conference call for analysts and investors to review these results at 9:00 a.m. (Eastern Time) tomorrow, February 7^th, 2020. The call can be accessed by dialing 416-764-8688 from within the Toronto area, or 1-888-390-0546 outside of Toronto. The eight-digit participant code is 27151295.

A playback of the call will also be available by telephone until 11:59 p.m. (ET) on Friday, February 14^th, 2020. The call playback can be accessed after 11:00 a.m. (ET) on Friday, February 7^th, 2020, by dialing 416-764-8677 from within the Toronto area, or 1-888-390-0541 outside of Toronto. The six-digit replay passcode number is 151295 #. The conference call transcript will be archived in the Investor Relations section of the Indigo website, www.indigo.ca.

Forward-Looking Statements

Statements contained in this news release that are not historical facts are forward-looking statements which involve risk and uncertainties that could cause results to differ materially from those expressed in the forward-looking statements. Among the key factors that could cause such differences are: general economic, market or business conditions; competitive actions by other companies; changes in laws or regulations; and other factors, many of which are beyond the control of the Company.

Non-IFRS Financial Measures

The Company prepares its unaudited interim condensed consolidated financial statements in accordance with International Financial Reporting Standards ("IFRS") and International Accounting Standards 34, "Interim Financial Reporting." In order to provide additional insight into the business, the Company has also provided non-IFRS data, including total comparable sales and adjusted EBITDA, in this press release. These measures do not have standardized meanings prescribed by IFRS and are therefore specific to Indigo and may not be comparable to similar measures presented by other companies. Total comparable sales and adjusted EBITDA are key indicators used by the Company to measure performance against internal targets and prior period results. These measures are commonly used by financial analysts and investors to compare Indigo to other retailers.

Total comparable sales is based on comparable retail store sales and includes online sales for the same period. Comparable retail store sales are based on a 52-week fiscal year and defined as sales generated by stores that have been open for more than 52 weeks. These measures exclude sales fluctuations due to store openings and closings, significant renovations, permanent relocation and material changes in square footage. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization, impairment, asset disposals, and share of earnings (loss) from equity investments. The method of calculating adjusted EBITDA is consistent with that used in prior periods.

About Indigo Books & Music Inc.

Indigo is a publicly traded Canadian company listed on the Toronto Stock Exchange (IDG). As the largest book, gift and specialty toy retailer in Canada, Indigo operates in all provinces and one territory under different banners including Indigo, Chapters, Coles, Indigospirit, and The Book Company. The Company also has retail operations in the United States through a wholly-owned subsidiary, operating its first retail store in Short Hills, New Jersey. The online channel, indigo.ca, offers a one-stop online shop with a robust selection of books, toys, home décor, stationery, and gifts.

Indigo founded the Indigo Love of Reading Foundation in 2004 to address the underfunding of public elementary school libraries. Every year the Indigo Love of Reading Foundation provides grants to high-needs elementary schools so they can transform their libraries with the purchase of new books and educational resources. To date, the Indigo Love of Reading Foundation has committed over $31 million to more than 3,000 elementary schools, benefitting more than 1,000,000 students.

To learn more about Indigo, please visit the "Our Company" section at indigo.ca.

Consolidated Balance Sheets
(Unaudited)
	As at	As at	As at
	December 28,	December 29,	March 30,
(thousands of Canadian dollars)	2019	2018	2019
ASSETS
Current
Cash and cash equivalents	216,198	249,251	41,290
Short-term investments	7,750	-	87,150
Accounts receivable	19,755	21,394	10,543
Loan receivable	720	-	-
Inventories	247,261	253,486	252,541
Prepaid expenses	6,604	6,802	5,802
Income taxes receivable	138	382	483
Derivative assets	19	4,189	1,070
Other assets	3,465	3,346	853
Total current assets	501,910	538,850	399,732
Loan receivable	926	-	-
Property, plant, and equipment, net	110,455	119,569	125,906
Right-of-use assets, net^1	449,998	-	-
Intangible assets, net	29,351	31,407	32,527
Equity investments	2,611	5,495	4,359
Deferred tax assets^1	91,228	38,648	47,940
Total assets	1,186,479	733,969	610,464
LIABILITIES AND EQUITY
Current
Accounts payable and accrued liabilities^1	261,281	268,403	179,180
Unredeemed gift card liability	65,676	57,751	48,729
Provisions	180	154	60
Deferred revenue	10,234	7,625	7,636
Short-term lease liabilities^1	42,707	-	-
Derivative liabilities	803	-	-
Total current liabilities	380,881	333,933	235,605
Long-term accrued liabilities^1	1,476	3,320	4,698
Long-term provisions	45	45	45
Long-term lease liabilities^1	556,873	-	-
Total liabilities	939,275	337,298	240,348
Equity
Share capital	226,986	225,530	225,531
Contributed surplus	12,463	12,526	12,716
Retained earnings^1	8,554	155,550	131,311
Accumulated other comprehensive income (loss)	(799)	3,065	558
Total equity	247,204	396,671	370,116
Total liabilities and equity	1,186,479	733,969	610,464
^1 The noted current period balances have been impacted by the adoption of IFRS 16. Refer to Note 3 of the unaudited interim condensed consolidated financial statements for additional information

Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss)
(Unaudited)
	13-week	13-week	39-week	39-week
	period ended	period ended	period ended	period ended
	December 28,	December 29,	December 28,	December 29,
(thousands of Canadian dollars, except per share data)	2019	2018	2019	2018
Revenue	383,737	425,971	779,657	847,660
Cost of sales	(216,872)	(252,700)	(444,119)	(499,034)
Gross profit	166,865	173,271	335,538	348,626
Operating, selling, and other expenses^1	(124,641)	(147,294)	(334,233)	(369,548)
Operating profit^1	42,224	25,977	1,305	(20,922)
Net interest income (expense)^1	(5,964)	722	(17,234)	2,282
Share of earnings (loss) from equity investments	-	2,812	(1,588)	1,694
Earnings (loss) before income taxes^1	36,260	29,511	(17,517)	(16,946)
Income tax recovery (expense)^1	(10,411)	(8,032)	3,842	3,911
Net earnings (loss)^1	25,849	21,479	(13,675)	(13,035)
Other comprehensive income (loss)
Items that are or may be reclassified subsequently to net earnings (loss):
Net change in fair value of cash flow hedges    [net of taxes of 190 and 283; 2018 - (1,401) and (1,404)]	(520)	3,815	(771)	3,821
Reclassification of net realized (gain) loss    [net of taxes of 0 and 215; 2018 - 404 and 557]	2	(1,100)	(586)	(1,571)
Other comprehensive income (loss)	(518)	2,715	(1,357)	2,250
Total comprehensive earnings (loss)^1	25,331	24,194	(15,032)	(10,785)
Net earnings (loss) per common share^1
Basic	$0.94	$0.80	($0.50)	($0.48)
Diluted	$0.94	$0.79	($0.50)	($0.48)
^1The noted current period balances have been impacted by the adoption of IFRS 16. Refer to Note 3 of the unaudited interim condensed consolidated financial statements for additional information.

Consolidated Statements of Cash Flows
(Unaudited)
		13-week	13-week	39-week	39-week
		period ended	period ended	period ended	period ended
		December 28,	December 29,	December 28,	December 29,
(thousands of Canadian dollars)		2019	2018	2019	2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)^1		25,849	21,479	(13,675)	(13,035)
Adjustments to reconcile net earnings (loss) to cash flows from operating activities
Depreciation of property, plant, and equipment and right-of-use assets^1		15,631	5,700	47,477	15,865
Amortization of intangible assets		3,393	2,921	9,971	7,475
Gain on disposal of equity investment		(1,484)	-	(1,484)	-
Loss on disposal of capital assets		70	527	1,021	857
Share-based compensation		359	438	980	1,414
Directors' compensation		65	75	222	260
Deferred income tax expense (recovery)^1		10,411	8,213	(3,842)	(3,913)
Other		278	(434)	634	(909)
Net change in non-cash working capital balances related to operations^1		113,337	112,840	93,806	96,973
Interest expense^1		6,466	3	18,867	6
Interest income		(460)	(726)	(1,633)	(2,288)
Share of (earnings) loss from equity investments		-	(2,812)	1,588	(1,694)
Cash flows from operating activities		173,915	148,224	153,932	101,011
CASH FLOWS FROM (USED FOR) INVESTING ACTIVITIES
Net purchases of property, plant, and equipment		1,098	(15,669)	(3,134)	(53,967)
Addition of intangible assets		(1,879)	(4,451)	(6,804)	(14,676)
Change in short-term investments		12,750	60,222	79,400	60,000
Distribution from equity investments		-	-	-	528
Interest received		587	726	1,413	2,288
Cash flows from (used for) investing activities		12,556	40,828	70,875	(5,827)
CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES
Repayment of principal on lease liabilities^1		(10,137)	-	(30,752)	-
Interest paid^1		(6,465)	-	(18,867)	-
Proceeds from share issuances		-	143	-	2,907
Cash flows from (used for) financing activities		(16,602)	143	(49,619)	2,907
Effect of foreign currency exchange rate changes on cash and cash equivalents		(286)	433	(280)	904
Net increase in cash and cash equivalents during the period		169,583	189,628	174,908	98,995
Cash and cash equivalents, beginning of period		46,615	59,623	41,290	150,256
Cash and cash equivalents, end of period		216,198	249,251	216,198	249,251
^1 The noted current period balances have been impacted by the adoption of IFRS 16. Refer to Note 3 of the unaudited interim condensed consolidated financial statements for additional information.

Non-IFRS Financial Measures
The following table reconciles total comparable sales to revenue, the most comparable IFRS measure:
			13-week	13-week
			period ended	period ended	% increase / (decrease)
			December 28,	December 29,
(millions of Canadian dollars)			2019	2018
Revenue			383.7	426.0	(9.9)
Adjustments
Other revenue^1			(5.0)	(3.1)
Adjustments for non-comparable items			(16.0)	(17.3)
Total comparable sales			362.9	405.6	(10.5)
^1Includes café revenue, irewards card sales, revenue from unredeemed gift cards, revenue from unredeemed Plum points, Plum Plus membership fees, corporate sales and revenue-sharing with Rakuten Kobo Inc.
The following table reconciles adjusted EBITDA to loss before income taxes, the most comparable IFRS measure, and shows the impact of IFRS 16 to the Company's statement of loss in the period:
		13-week		13-week	13-week
		period ended		period ended	period ended
		December 28,		December 28,	December 29,
		2019		2019	2018
(millions of Canadian dollars)		IFRS 16	Impact of IFRS 16	IAS 17	IAS 17
Revenue		383.7	-	383.7	426.0
Cost of sales		(216.9)	-	(216.9)	(252.7)
Cost of operations		(77.8)	(15.6)	(93.4)	(100.0)
Selling, general and administrative expenses		(29.2)	(1.0)	(30.2)	(38.2)
Adjusted EBITDA^1		59.8	(16.6)	43.2	35.1
Depreciation of property, plant and equipment and right-of-use assets		(15.6)	10.0	(5.6)	(5.7)
Amortization of intangible assets		(3.4)	-	(3.4)	(2.9)
Gain (loss) on diposal of capital assets and equity investments		1.4	-	1.4	(0.5)
Net interest income (expense)		(6.0)	6.5	0.5	0.7
Share of earnings from equity investments		-	-	-	2.8
Earnings before income taxes		36.3	(0.1)	36.2	29.5
^1 Earnings before interest, taxes, depreciation, amortization, impairment, asset disposals, and share of earnings (loss) from equity investments.

SOURCE Indigo Books & Music Inc.

Kate Gregory, Director, Public Relations, 416 364 4499 ext. 6659, [email protected]

Related Links

http://www.indigo.ca