Indigo Books and Music Inc

TSX:IDG

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Indigo Books & Music Inc. first quarter results conference call. [Operator Instructions] This call is being recorded on Wednesday, August 8, 2018. I would now like to turn the conference over to Hugues Simard. Please go ahead.

[Hugues Simard, CFO & Executive VP]

Good morning, everyone, and thank you for joining us to review Indigo's first quarter fiscal 2019 results. My name is Hugues Simard, and I'm the CFO of Indigo. Our Chief Executive Officer, Heather Reisman, is unfortunately unable to join us. But she may join us for the question period at the end. Regarding the materials for this conference call, we issued the press release yesterday. It can be found at indigo.ca and on SEDAR. The conference call will be recorded and archived in the Investor Relations section of the Indigo website. A playback of the call will also be available by telephone until 11:59 p.m. Eastern Time on August 15, 2018. This conference call may contain forward-looking statements. And to the extent that it does, we refer you to our cautionary statement regarding forward-looking statements in the press release and the MD&A related to this quarter. I will make a few comments as usual and then open up the lines to answer your questions. The results we are discussing today are for the 13 weeks ended June 30, 2018. Comparative figures have been provided for the 13 weeks ended July 1, 2017. First and foremost, let me start by saying that we have embarked upon the largest and most aggressive investment program of our history to position ourselves for long-term growth, both in our retail network and online. Throughout the quarter, we've worked to transform 16 large format stores on our journey to become cultural department stores for book lovers, completing 2 of these renovations and with 12 more coming on stream before the crucial holiday season, including 2 flagships in Toronto at Bay & Bloor, and downtown Vancouver on Robson Street, and our first store in the U.S. In addition, we invested heavily in supply chain, both in our Brampton facilities and opening up our new Calgary distribution center. And finally, online with several new functionalities being launched over the next few months. This massive undertaking has temporarily hit our top line and bottom line, of course. But on the basis of the excellent results of our renovated stores, the expected productivity gains and service improvements from our Calgary DC, as well as the continued enhancement of our online experience. We strongly believe that the short-term pain is more than worth it to position ourselves for a long-term sustainable growth in both of our channels. Revenue at $205.4 million for the quarter was $1 million less than the first quarter last year, impacted by the expected downward pressure of ongoing renovations and the closure of a few low-performing stores as part of our transformation strategy. We also prompt over a onetime gift card breakage revenue adjustment of $3.8 million last year. That being said, excluding the noise from our investment program and onetime adjustment, total comparable sales, including online, were up 2.4% in the quarter, with growth in retail and continued double-digit growth online with an increase of comparable sales of 12.7%. Online sales grew in both prints and general merchandise with highly successful promotional campaigns resulting in a lift across key performance metrics. Our vast investment program also impacted our bottom line, of course. Adjusted EBITDA for the quarter decreased by $13.4 million year-over-year, as the top line impact and the onetime breakage adjustment slowed down the margins; and due to the significant strategic operating expenses associated with our store renovations, with the new distribution centers as they -- and especially the one in Calgary as it ramps up and our online development. Operating costs also increased due to the sales volumes on the online channel and as well as the impact of legislative minimum wage increases in Ontario, Alberta and BC. Even as we are investing heavily though, our balance sheet continues to be very strong. We ended the quarter with $155 million in cash and short-term investments while having no debt. At this point, that's all I'll say on the results. We would be happy to answer your questions. So let's open up the call for any questions from our analysts.

[Operator]

[Operator Instructions] Your first question comes from David McFadgen, Cormark.

[David John McFadgen, Director of Institutional Equity Research]

A couple of questions. So first of all, can you just go over exactly what happened in the quarter, again? I wasn't totally understanding it. So you said, there are 16 large format stores that were in renovation in Q1. Is that correct?

[Hugues Simard, CFO & Executive VP]

Yes, we've worked -- exactly, the total number of stores that we've worked on during the quarter is 16. We've already opened 2 of them. We are going to open another 12 of them between now and November. And there is going to be a couple of others that we'll be opening in Q4, but -- we have started to work on them.

[David John McFadgen, Director of Institutional Equity Research]

Okay. So the balance is 2. So 2 will be opening in Q4, and you won't -- they won't be -- well, I guess they won't be completed for the December quarter, correct?

[Hugues Simard, CFO & Executive VP]

Yes, only 2 out of the 16. So out of the 16 I've talked about, 2 are already open, another 12 will be -- so 14 total will be open for the crucial holiday season. Yes.

[David John McFadgen, Director of Institutional Equity Research]

Yes. But for those remaining 2, they would still be open. It's just that the renovation wouldn't be completed, right, for the December quarter?

[Hugues Simard, CFO & Executive VP]

Yes, that's correct.

[David John McFadgen, Director of Institutional Equity Research]

Yes, okay. So on that $3.8 million breakage. Is the margin on that a 100%?

[Hugues Simard, CFO & Executive VP]

Yes.

[David John McFadgen, Director of Institutional Equity Research]

Yes, okay. That's what I thought. And then on the new distribution center, the cost for that -- I thought that, that would actually make you more efficient and results in a margin improvement, or should it really be looked at as additional cost, I mean, you have to ramp the revenue and then we will be more efficient?

[Hugues Simard, CFO & Executive VP]

Yes, it's the second case. I mean, we are opening -- I mean, we're opening at the end of the summer, right. And basically, we're doing this in steps. So we're opening gradually, starting in the fall. So right now, and throughout the quarter, as we're ramping up and as we're hiring people and as we're putting in the equipment and all of that. So right now, it's more of a cost drains. But as we open it up in the fall and certainly for next year, this will be -- this is where the improvement -- the significant margin improvement will come over time for this one.

[David John McFadgen, Director of Institutional Equity Research]

So when do you think we would actually see this being a net benefit, the new distribution centers. Is it 6 months away, 12 months away?

[Hugues Simard, CFO & Executive VP]

Well, we'll start to see benefits in our Q3. And then by -- and some in Q4 as well. And after that, it'll be fully on stream. And we'll have -- we should have full efficiencies from there on.

[David John McFadgen, Director of Institutional Equity Research]

And then, it would be a net positive to the business?

[Hugues Simard, CFO & Executive VP]

Correct. Absolutely, absolutely. I mean, having a new distribution center in Calgary both from our -- for our retail network and for the end customer is going to be a big plus.

[David John McFadgen, Director of Institutional Equity Research]

Okay. And can you give us an update on the New Jersey store?

[Hugues Simard, CFO & Executive VP]

Yes, that's -- it's on track. It's opening at the end of the summer, early fall. It'll be, most probably, late September opening. So we are working feverishly. It's starting to look very, very good and everything's in place. And we're very excited about it. So wait and see. But it's coming. You'll get your invitation for the opening.

[David John McFadgen, Director of Institutional Equity Research]

But is it going to be -- I thought it was going to be a soft opening in, say, August, then the full fledge opening, I guess, in September? Is that the case? Or is it going to be a soft opening in September?

[Hugues Simard, CFO & Executive VP]

Yes. We're -- right now, we're looking at a soft opening. First, sometime in September and then the full opening after that.

[David John McFadgen, Director of Institutional Equity Research]

Okay, okay. So I think in the past, the goal long term has been to get or achieve an EBITDA margin of, say, 8% or higher. Is that still the goal of the company? And when do you think that might actually be achieved?

[Hugues Simard, CFO & Executive VP]

It is still the goal of the company for sure. And we knew that as we were going to invest in the 3 main sectors, retail, supply chain and online, that this would -- that we would take a hit doing it. But we fully believe on our long-term plan. And we fully believe that once these crucial investments are all done and the efficiencies and the -- all the gains come from it that we'll be on our track to our original goal of EBITDA margin.

[David John McFadgen, Director of Institutional Equity Research]

And is there going to be in your, say, fiscal 2020, you're in fiscal 2019 right now. Is there going to be another large CapEx investment program heading into that year as well or is this the main year?

[Hugues Simard, CFO & Executive VP]

Well, this, certainly, is an important year. We'll see how this comes along. I mean, as we said, both for our U.S. market test, for the retail transformation, I mean, we are proceeding on all of these fronts. And next year, surely if we follow up with more renovations, there'll be further noise on the lines. But that being said, don't forget that we will get the positive from all these new stores coming on stream in this first wave of good performance. So I think that will help us and that will give us momentum going forward.

[Operator]

[Operator Instructions] And there are no questions at this time. Please proceed.

[Hugues Simard, CFO & Executive VP]

Okay. Thank you very much everybody for your time this morning and for your attention and for being with us early in the morning. We appreciate you calling in and look forward to reconnecting on the quarterly basis. Our second quarter results will be announced on or around November 6. And thank you again, and have a good day. Thank you. Bye-bye.

[Operator]

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.