Indigo Books and Music Inc

TSX:IDG

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Indigo Books & Music Inc. Financial Year 2022 Q2 Analyst Conference Call. [Operator Instructions] This call is being recorded on Wednesday, November 10, 2021. I would now like to turn the conference over to Craig Loudon. Please go ahead.

[R. Craig Loudon, CFO & Executive VP of Supply Chain]

Good morning, and thank you for joining us to review Indigo's Fiscal 2022 Second Quarter Results. My name is Craig Loudon, and I'm the Chief Financial Officer. Joining us from Indigo today is the Chief Executive Officer, Heather Reisman. 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 November 17, 2021. 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 would now like to turn the call over to Heather Reisman.

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

Good morning, everyone, and thank you for joining us. Our strong sales performance this quarter, double-digit revenue growth, with improvements across both our print and general merchandise business, delivered second quarter revenues that exceeded both last year and pre-pandemic levels. Specifically, sales were $238.8 million, a 16.3% increase over last year and a 17.4% increase over fiscal 2020. This sales momentum is being enabled by the strength of our omnichannel strategy, the continuing strength of the book business and strong general merchandise growth. It is worth noting that these numbers were achieved despite the reality that capacity restrictions in retail continue to exist in several markets, and foot traffic in city centers remains far below historic levels. Of note, we are particularly pleased with the growth of OUI, our proprietary home brand, and with our newly introduced sustainable paper brand, Nóta. Nóta resonated extremely well during the back-to-school, back-to-work period, and we are pleased to see such strong alignment between our commitment to sustainability and the commitment of our customers. Building quality proprietary product, designed in-house, is key to our growth strategy. And while on the subject of sustainability, we were pleased this month with the public launch of our Write The Future sustainability strategy where we formally declared our commitment to be net 0 by 2035. We encourage everyone to visit our website at indigo.ca/sustainability. In addition to our commitment to the planet, we remain steadfast in our commitment to children's literacy in Canada. Over the past year and advance this quarter, we provided over $2.2 million in grants to promote literacy and high-needs communities, an effort, which includes a purposeful focus on reaching indigenous children across 9 provinces and the territories. While Craig will provide a detailed financial perspective, I would just note that we delivered an adjusted EBITDA of $10.6 million. This was driven by a number of things, including strong sales a strengthened operating model, which included greater sell-through of full-priced goods and a more effective leverage cost structure and out-of-the-ordinary benefit, offset by lower government support. I will now pass it over to Craig.

[R. Craig Loudon, CFO & Executive VP of Supply Chain]

Thank you, Heather. The results we are discussing are for the 13 weeks ended October 2, 2021. Comparative figures referenced the 13 weeks ended September 26, 2020. In the second quarter, we generated revenue of $238.8 million, an increase of $33.5 million or 16.3% from the second quarter last year. This increase in revenue was notably experienced across the company's print and general merchandise businesses. The print business continued to experience strong demand, driven by a younger demographic and the popularity of reading on social media. And as Heather discussed, the company's proprietary brands, in particular, the Home Brand, OUI, are meaningfully contributing to the growth of the general merchandise business. As a result of temporary store closures from COVID-19, the impact of social distancing and government-mandated capacity concerning reopen supporters, we believe that comparable sales are not currently meaningful to evaluate performance. Instead, we focused on total revenue as discussed as well as omnichannel fulfillment trends. The retail channel, which is inclusive of orders fulfilled through omnichannel store pickup, increased by 16.7% to $159.6 million for the 13-week period ended October 2, 2021. Retail revenue growth was achieved through improvements in traffic, conversion and average transaction values as pandemic conditions softened and the company's retail network performed stronger than in the same period last year. Online channel revenue decreased by $8.4 million or 13.3% to $54.6 million for the 13-week period ended October 2, 2021. This moderated demand reflects the rebound of retail as discussed. The online channel sustained sales levels at 85% above pre-COVID fiscal 2020 and continues to be a lever of omnichannel growth and investment focus.To offer greater connectivity to brands doing business on modern e-commerce platforms and to unlock a drop-ship opportunity to sell on indigo.ca, the company integrated with convictional as a technology partner in the second quarter. This is only the beginning of the company's digital transformation agenda, and we look forward to sharing our plans around an enhanced digital experience in future quarters. Cost of sales increased by $2.9 million to $128.8 million for the 13-week period ended October 2, 2021. Excluding the impact of online shipping costs, cost of sales increased by $2.1 million to $119.2 million for the period. As a percentage of total revenue, this represents a decrease to 49.9% compared to 57.0%. While this was driven by the retail channel rebound, which typically has a higher margin profile, the company realized merchandise margin improvements in both channels. These improvements more than offset the adverse impact of higher inbound freight costs triggered by global supply chain constraints.Online shipping costs increased by $0.8 million to $9.6 million for the 13-week period ended October 2, 2021, largely due to increased fuel costs, which reflect the macroeconomic conditions of the commodity market. Overall, operating, selling and administration costs increased by $10.9 million to $84.2 million for the period. Operating costs were offset by the recognition of $2 million in occupancy, abatement and government rent and payroll subsidies, markedly lower than the $5.3 million the company was eligible for and recognized in the prior year. Operating costs also increased on the return of higher sales volumes in the retail channel.Adjusted EBITDA improved by $21.9 million to $10.6 million for the 13-week period ended October 2, 2021. Higher adjusted EBITDA was driven by strong sales performance and stronger merchandise margins and achieved against lower external COVID-19 labor support and the corresponding increase in retail operating expenses. Adjusted EBITDA also benefited from a onetime payment of $17 million resulting from the renegotiation of the company's partnership with its primary cafe vendor. The company recognized net earnings of $3.5 million for the 13-week period ended October 2, 2021, or $0.13 net earnings per common share compared to a net loss of $17.5 million or $0.63 net loss per common share for the same period last year, an improvement of $21.1 million.With no outstanding debt and undrawn $25 million revolving credit facility, and cash of $71.9 million, the company is well positioned to see through the remaining COVID-19 uncertainty and the execution of a post-pandemic growth strategy. At this point, we would like to open the call for any questions.

[Operator]

[Operator Instructions] Your first question comes from Sid Dilawari with Cormark Securities.

[Siddhant Dilawari, Associate of Institutional Equity Research]

Just a few housekeeping ones for me first, and then I'll ask one big picture one. Just looking at the revenue composition, just excluding the $17 million Starbucks payment, Print was approximately 59%, merchandising was 38% of revenue, slightly more weighted towards merchandising, I guess. Are you happy with this -- relative to last year, are you happy with this composition? Or would you like it to be more weighted towards either of the categories?

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

Sorry, could you just say that again -- you're saying that the -- it's Heather speaking. You're saying that the -- you're noting the mix between our general merchandise and lifestyle and books. Is that what you're asking?

[Siddhant Dilawari, Associate of Institutional Equity Research]

Exactly, yes so I was just asking if you're happy with this composition? Or would you like it to be slightly more weighted towards merchandise or book going forward?

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

No, we're extremely happy with the mix because the customer is telling us 2 things. As the business grows, the customer is telling us, they still value significantly the role we play in books. So that business is remaining strong, and we're really happy with the strength of that business. And at the same time, as the business grows, our general merchandise business grows. What we will look at moving forward because we see even greater potential for the growth of our lifestyle business is always to sustain a strong position in books and a strong market share in books. It is the foundation of the business. So we're really happy with where is that, and we see lots of growth potential on both sides.

[Siddhant Dilawari, Associate of Institutional Equity Research]

Okay. Great. That's helpful. And just on that point, in the MD&A, there was a mention regarding younger demographic being more interested in reading versus previously. Is there something that drove that? Or, like, was it something related to marketing or was it just organic?

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

Actually, it's organic and it's been supported by TikTok. Canadian -- young Canadians have said, "We love to read, and we love to talk about reading and we're going to talk about reading on TikTok." And it has just blown up.

[Siddhant Dilawari, Associate of Institutional Equity Research]

Okay. That makes sense.

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

Which is a great sign, right? It says as things are evolving, people are speaking about the importance of reading in their life and their joy of books. So seriously, it's fantastic.

[Siddhant Dilawari, Associate of Institutional Equity Research]

Yes, I know it's good to see that bounce back from digital. Like, you -- personally for myself, like I always like reading with hard coffee, and I always -- and I like even now, but that's good to hear. And then sorry, just one for Craig. You mentioned inflationary pressures on input costs, primarily from freight costs. Are you seeing any inflationary pressures just from any other supply chain disruptions that we're seeing worldwide, not just related to freight or any other input costs on the merchandising side that you're seeing are rising? And if yes, are you passing these costs on to the consumer? Or are you just sort of waiting to -- waiting for it to stabilize and just consuming it yourself for the time being?

[R. Craig Loudon, CFO & Executive VP of Supply Chain]

So the inbound freight cost has definitely been the most significant. And I think I won't go on too much about that. It's been heavily covered in the news. And we've been experiencing that, frankly, since the start of the year. So you already see that in the run rate and -- but we expect that to continue into next year. The next largest one would be slightly related just in that fuel, the cost of commodities has gone up significantly. So all our carriers that do both our inbound, our store distribution network and then also our direct-to-consumer transportation. We're seeing high fuel surcharges there. So that would probably be the next biggest one. There's always other commodity pressures in goods. But so far, we are fending that off. There's always some design considerations you can make to in product. As far as passing on to the consumer goes, although we haven't really changed many of our ticket prices, we definitely have been following a far less promotional selling strategy. And that is definitely showing up in significant margin strength. Our -- the margins we're seeing are some of the highest we've seen in the company's history, and that's as a result of lower discounting. So that's really helped to get around that cost of goods as well.

[Siddhant Dilawari, Associate of Institutional Equity Research]

All right. Okay. Okay. That's helpful. And then just quickly on working capital. We obviously saw massive working capital spike related to inventory during the quarter. Is that largely due to anticipation of a strong holiday season? Or is there something else happening here?

[R. Craig Loudon, CFO & Executive VP of Supply Chain]

No, that's exactly right. And I think also, it's much smaller compared to historical levels, but you have to keep in mind when you look year-over-year, we follow a very conservative and prudent approach last year, keeping inventory extremely tight, given where COVID was out at that point and the risk of stores closing. And it's lucky we did do that last year because, in fact, we did find ourselves close for Christmas in Toronto and then subsequently all of Ontario. So inventory was unusually low last year, and that's what you're seeing.

[Siddhant Dilawari, Associate of Institutional Equity Research]

Okay. And then just one last -- one big picture one for me. Just over the past 2 years, you have renovated your stores, you have rejuvenated -- or still rejuvenating your merchandise lineup. Is there anything else that's on your list of things to do from a strategic standpoint?

[R. Craig Loudon, CFO & Executive VP of Supply Chain]

Heather, do you want to take that one? Or do you want me to...

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

Sorry, you broke up just a bit. Can you just ask that one again?

[Siddhant Dilawari, Associate of Institutional Equity Research]

Sure. I was just asking, over the past 2 years, you have renovated your stores, you have rejuvenated -- or still rejuvenating the merchandising lineup here. Is there anything else that's on your list of things to do from a strategic standpoint?

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

We have lots actually on our plans related to online related to stores. There's just a significant amount of planning going on for advances and changes that we're planning. But we -- so a significant amount of work going on for changes we're planning, but we will announce those when they happen. We always do -- as we always do. But there's lots in the works, lots.

[Siddhant Dilawari, Associate of Institutional Equity Research]

I'm sorry, Craig, you were going to say something I think?

[R. Craig Loudon, CFO & Executive VP of Supply Chain]

No, I was just going to say, as we mentioned on the last analyst call, too, I think our #1 priority right now is really digital reinvention. And so we've been working on that throughout the pandemic. But that's certainly -- as Heather noted, there's a lot going on, but that's certainly #1 on the list.

[Operator]

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

[R. Craig Loudon, CFO & Executive VP of Supply Chain]

Thank you for your time and attention today. We appreciate you calling in and look forward to reconnecting on a quarterly basis. Our third quarter results will be announced on or around February 10. Thank you again for your support, and have a great day.

[Operator]

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