Indigo Books and Music Inc

TSX:IDG

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Indigo Books & Music Inc. FY '19 Q2 Investor Analyst Conference Call. [Operator Instructions] This call is being recorded on Wednesday, November 7, 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 second quarter fiscal 2019 results. My name is Hugues Simard, and I'm the Chief Financial Officer. Also joining us from Indigo is our Chief Executive Officer, Heather Reisman.Regarding the materials for this conference call, we issued a press release after market closed yesterday, and it can be found at indigo.ca and on SEDAR. This conference call will be recorded and archived in the Investor Relations section of our Indigo website, and a playback of the call will be available by phone until midnight on November 14.This conference call may also 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 in the MD&A created for this quarter.I will make a few comments on the results for the 13 weeks ended September 29, 2018, and Heather and I will then be happy to answer your questions. As we discussed last quarter, we have embarked on one of our most ambitious capital investment plans in our history. We had tested over the past few years our concept. Our new concept stores land with tremendous success, and we had then rolled them out to a -- an unprecedented number of stores during this quarter. While this transformation will unlock future growth for the business as we continue to see impressive revenue and contribution when these new stores come online, there is a temporary impact on sales and profitability. Total revenue at $216.3 million was down $8.3 million compared to the second quarter of last year. All of this decline -- actually more than all of this $8.3 million decline is due to 2 outside factors. One, the disruption from the store closures and renovations; and two, a onetime gift card breakage revenue adjustment last year, resulting from a change in accounting estimates. Excluding these 2 onetime factors, total comparable sales, including online, were up a modest 0.7%, driven by a 7.3% growth online with gains in both books and general merchandise and a continued healthy increase in online traffic.Margin before operating and home office costs decreased by $12.4 million from last year, most of which resulting from these onetime factors that I discussed, namely the disruption from the stores and the breakage adjustment, and then some also due to deeper discounting and a higher proportion of lower-margin online sales.Overall, operating, selling and admin costs increased by $7.6 million this quarter compared to last year due to the impact of legislative minimum wage increases across the country and the disproportionate costs associated with the company's expanding distribution facilities, both in Calgary and in Brampton, which are not yet fully operational and as thus, not yet reached their economies of scale. While these strategic investments in reimagining our stores, optimizing our distribution facilities and improving our online experience are clearly impacting our profitability in the short term, we are confident based on the overwhelming response to our new stores, our sustained growth in online sales and the efficiencies expected from our enhanced supply chain network, that these investments are key in positioning us for future growth. I also wanted to share that we opened our first U.S. location in October, as planned, at the Mall in Short Hills in New Jersey, a milestone that we are very proud of.We have also opened a new flagship store in Vancouver on Robson Street, and as we opened our beloved Bay & Bloor store here in Toronto.Finally, we continue to maintain a strong balance sheet position with $120 million in cash and short-term investments while still having no debt.At this point, I would like to turn it over and ask for your questions, which we will be happy to answer.

[Operator]

[Operator Instructions] Your first question comes from Bill Gibson from PI Financial.

[Hugues Simard, CFO & Executive VP]

Bob, I didn't know you were Bill this morning. But...

[Robert Gibson, MD, Head of Research & Consumer Products Analyst]

Yes, today. We've got to change the names up every time. Okay. So the big question, of course, is, any thoughts on how many rentals you might do next year?

[Heather M. Reisman, Founder, Chairman & CEO]

Heather here. I would just weigh in and say we will probably do fewer next year, just depends. We need to absorb a fair amount of this into the system. So right now the plan is we do have a couple on the list for next year and a slightly more modest program while we absorb all of what was going on this year.

[Robert Gibson, MD, Head of Research & Consumer Products Analyst]

Okay. You noted in the cost of sales that there was some deep discounting as you moved through unproductive inventory. Can I get some color on that? And how does that sit?

[Heather M. Reisman, Founder, Chairman & CEO]

Yes, 2 things. We -- because we had this major program, we originally anticipated we were doing the planning for the program. We originally anticipated that we would be able to get many more of the stores opened in the July -- around the July period. But it turned out for all kinds of reasons, different by location, construction issues, major delays in city permits, things that were not normal to be expected, a lot of the stores got opened -- or a good number of them got opened quite a bit later than we anticipated. In some cases, it was landlord construction was delayed beyond what they originally told us. It was just a series of issues. We had bought inventory for all of these stores, and that inventory then had to get moved through our system. So it had an impact. The over-inventory had a very meaningful impact on us. There will be some of it. Some of it will still move into this third quarter. We just opened a slew of stores in the last couple of weeks. So it will have some impact in the third quarter and then we should be pretty much through the problem.

[Robert Gibson, MD, Head of Research & Consumer Products Analyst]

Okay, good. It looks like you still have a -- you're working on some rentals that will be finished in...

[Heather M. Reisman, Founder, Chairman & CEO]

Fourth quarter.

[Robert Gibson, MD, Head of Research & Consumer Products Analyst]

Yes. How do you -- sorry. How do you handle that over the Christmas rush?

[Heather M. Reisman, Founder, Chairman & CEO]

Well, the fourth quarter are actually moves -- as we're moving from one location to another. So we'll stay in our old location for Christmas and then move across after Christmas.

[Robert Gibson, MD, Head of Research & Consumer Products Analyst]

Oh, okay. That's good.

[Hugues Simard, CFO & Executive VP]

There won't be rentals during the Christmas time, Bob. Just to be clear, the -- we're opening another 5 stores between the -- in the next few weeks. And then as Heather said, then the -- we've got a few more, but we'll wait until Q4 to open these.

[Robert Gibson, MD, Head of Research & Consumer Products Analyst]

And then lastly, free promotions seem to be costing you a bit. What are your thoughts on that going forward?

[Heather M. Reisman, Founder, Chairman & CEO]

You're talking about online or in-store?

[Robert Gibson, MD, Head of Research & Consumer Products Analyst]

Online shipping.

[Heather M. Reisman, Founder, Chairman & CEO]

Yes, online shipping. Look, there's no question that it's a competitive battle out there, and we've put a big focus on sustaining our customers. So every now and then, that will happen. We are looking at a number of things to mitigate the cost. We just launched our first test of click and collect, which allows the customer to literally find the items and pick them up in-store. That gets rolled out next -- it's just in, I don't know, 8 or 9 stores as we make sure that it works, but that gets rolled out fully in fourth quarter of next year, and that is a major initiative to mitigate the need for that kind of promotion, but it's -- it is competitive.

[Robert Gibson, MD, Head of Research & Consumer Products Analyst]

Yes, definitely, definitely. So -- sorry, last...

[Heather M. Reisman, Founder, Chairman & CEO]

We have 2 things, right? We -- this year, we tested the click and collect, which rolled out, as I say, in the fourth quarter. We actually also -- we also opened our Calgary warehouse. And the Calgary warehouse until through Christmas will operate to support retail. But again, starting in January, that will operate -- that will support online as well, and that takes a huge burden off costs -- distribution costs for the rest of Canada.

[Robert Gibson, MD, Head of Research & Consumer Products Analyst]

Perfect. And can you give...

[Heather M. Reisman, Founder, Chairman & CEO]

This has been a year of a lot of -- very significant amount of investment in the company to set ourselves up.

[Robert Gibson, MD, Head of Research & Consumer Products Analyst]

Yes, definitely. Sorry, lastly, how -- for those who haven't seen it, how might the New Jersey store compare to, say, Sherway Gardens?

[Heather M. Reisman, Founder, Chairman & CEO]

Well, the New Jersey store's the next generation of our -- sort of the evolution of Sherway Gardens. But if you visit the Bay & Bloor store in Toronto, which is -- it's fully operating. It's still a little bit -- the building is still under construction. But the New Jersey store, although on one floor, looks more like the Bay & Bloor store. So it's our newest model.

[Operator]

[Operator Instructions] There are no further questions at this time. Please proceed.

[Hugues Simard, CFO & Executive VP]

Okay. Well, thank you, everyone, for your time this morning. We appreciate you calling in and look forward to reconnecting on the quarterly basis. Our third quarter results will be announced on or about February 5 of next year. So I thank you again on behalf of Indigo and have a good day.

[Heather M. Reisman, Founder, Chairman & CEO]

Thank you. Thank you.

[Hugues Simard, CFO & Executive VP]

Thanks.

[Operator]

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