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Indigo Books and Music Inc
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Good evening, ladies and gentlemen, and welcome to the Indigo Books & Music Q3 Investor and Analyst Conference Call. [Operator Instructions] This call is being recorded on Tuesday, February 6, 2018. I would now like to turn the conference over to Hugues Simard. Please go ahead.
Thank you, and good evening, everyone. Thank you for joining us to review Indigo's Third Quarter Fiscal 2018 Results. My name is Hugues Simard, and I'm the Chief Financial Officer of Indigo. Our Chief Executive Officer, Heather Reisman, is unfortunately unable to join us today. Regarding the materials for this conference call, we issued the press release after market close today. 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 February 13 of this year. 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 and year. I will make a few comments and then open the lines to answer your questions. The results we are discussing are for the third quarter, the 13 weeks ended December 30, 2018. Comparative figures have been provided for the 13 weeks ended December 31 of the year before. For the third quarter, we are happy to announce another record quarter of revenue growth, our 17th straight quarter of top line growth, and let's remember, comping a strong holiday performance last year. Third quarter revenues were $433.3 million, which was $33 million more than last year, an 8.2% revenue growth fueled by broad growth across all channels and product categories. Total comparable sales, including online, were up 7.9% for the quarter, driven by equally impressive online growth and in-store results. Comparable retail store sales for the quarter increased by 4.9% in superstores and by 2.3% in our small-format stores. Online sales grew by 26.4%. We continue to see double-digit growth in general merchandise, with lifestyle and toys performing remarkably well, being close to 20%. The core trade book business remains healthy, showing growth over last year, due to the release of several popular titles, as opposed to last year, as you'll remember, more of a blockbuster in the Harry Potter that was continuing in Q3. Margin dollars increased by $11.9 million due to higher sales volumes in retail and online and higher Plum breakage, but margin rate experienced a decline of 0.6%. The downward pressure on margin was a result of higher penetration of our online channel, which by nature, is slightly lower margin and more promotional during this holiday season. Operating, selling and administration costs increased by $6 million compared to last year, largely driven by higher sales volume as well as investments in our distribution centers to support profitable growth. However, total cost decreased as a percentage of sales. Overall, adjusted EBITDA increased by $6 million for the quarter, driven by top line growth, which was partially offset by a lower margin rate, as discussed earlier, and increased operating costs across the company to support our growth. Our net earnings for the second quarter were $42.6 million, up $2.6 million from last year. On a fiscal year-to-date basis, revenue increased by $53.8 million or 6.6% to $864.1 million compared to $810.3 million for the same period last year. Year-to-date total comparable sales, which include online sales, increased 6.2%, that's on a year-to-date basis; while comparable retail stores increased 3.8% for superstores and increased 1.5% in small-format stores. Year-to-date adjusted EBITDA improved $7.8 million, driven by higher revenue, partially offset by higher operating costs and investments to support strategic projects as we discussed previously. Our balance sheet continues to be very strong. We ended the quarter with cash and short-term investments of $308 million. Our total assets totaled $734.6 million, an increase of $126 million from last year. And we still have no debt. We're very proud of these results and very happy with another strong holiday season, a testament to the strength of our brand and to the passion and engagement of our entire team. Looking ahead, as our reimagined stores continue to perform exceptionally well, we will be accelerating the rollout of the new concept over the coming months, including the renovation of our Bay & Bloor store down here in Toronto and the opening of the new flagship in downtown Vancouver. We also continue to invest in online to keep adding functionalities and improving the digital experience. And also, we will open a new distribution center in Calgary. So quite a busy plan ahead with many initiatives on the go, which will lead to significant growth and productivity improvements. At this point, we would like to open the call for any questions that you may have.
[Operator Instructions] Your first question is from Bob Gibson from PI Financial.
Accelerated rollout, can you give us some -- a little color on that? Maybe how many stores this year?
Well, we are -- as you know, we kind of put that on hold for Q3, which is our big quarter, as we always do because we only focus on operations. Now we are starting again. So for Q4 of this -- so ending this fiscal '18, we're going to be working on a few stores and then about another 20 stores for the next fiscal year. So there'll be a little bit north of 20 stores being renovated over the next 12 months.
Okay. And any color on U.S. expansion.
That is still in the plans. As we had announced I think at last time, that we were -- that we had signed a lease in New Jersey. This is still in the plans we are working. This is one of the stores on which we are currently working on design. We are looking at other opportunities in other locations in the U.S. as well. But nothing really to add at this point. I think our plans have not changed. We are -- as we've said, we are committed to testing the U.S. market and to opening a few stores, 3 or 4 stores in the next 24 months or thereabouts. So we're still proceeding and going ahead with it.
Okay. And Casper nap pods, supposedly you've got 7 -- you're in 7 locations now. What do you think the potential might be?
Well, right now, it's more of a commercial agreement until we get more data on this. I think the potential -- I mean, we think the potential is very strong, is very high. It fits well with our wellness -- the development of our wellness area and sleep well and all our other either books or other products that are related. So strategically, we think it fits well. We'll see how this goes. I mean, right now, it's more of a -- people get a coupon and then they -- when they visit the pods in our largest stores and then they can buy them online. We'll have to see how that evolves, but we're monitoring, I should say, see the interest very closely. And so far, it's been working well.
Okay. And then lastly, can I get an update on the distribution facility in Calgary?
We are -- well, we had announced, right, we purchased that as part of the Sears process late last year. So we are now -- we have occupancy, that we have access to it now, and we are now adding some equipment in it. And obviously, there's significant IT to be added as well. And we're looking in a few months to be testing and sort of, well, "soft launching" it in the spring to be ready for the fall period.
So you think it'll be ready for Christmas?
Well, that's the plan. Yes.
Your next question is from David McFadgen from Cormark Securities.
Just following up on some questions on the expansion of the new stores.
Yes.
Seems like there's an echo on the line here. So how many do you think you will have renovated for your fiscal 2018 here, given you're going to do 20 in fiscal 2019?
Well, we've already -- let's see. We've already renovated about 6, right? Am I getting this right? Yes. And we are working on a few more. So I don't know. I mean, our fiscal year, if that's your question, is going to end at the end of March, right. So I don't think we'll deliver any further stores by the end of this fiscal year. But work is starting, and we're going to deliver about 20 a year or thereabouts, so over the next fiscal year.
Okay. You have the team in place. Because obviously, to go from 6 to 20 is quite a lift, right? Quite a lot of growth there.
Yes, yes, yes. But we wanted to see the performance of these first few that we had opened in different markets and really refine our designs and our -- everything that -- our concept a little bit. And so now we've -- now that we're done, the results are really outstanding for all those stores that we've renovated. So we're ready to go, and we're going to be -- we're going to be doing this right. I mean, it's not a race. We will do this right. But we are in a position to accelerate now, and we're looking forward to very interesting sales top line pickup in the months after the opening.
So the 20 stores for fiscal 2019, does that include the U.S. expansion as well?
Yes. But the U.S. -- well, yes, it does. But the U.S. expansion at this point, as I said, I mean, we are looking at only a few stores, may be 2 to 3 stores over the next 24 months. So there's probably only 1 or 2 stores in that number that I quoted here for fiscal '19.
And so if you look out into fiscal 2020, I know it's a little ways away, but do you think that you would still be doing this new store concept in Canada until 2020?
I'm sorry. Your question, if you would still be rolling out this new concept in fiscal 2020, is that what you're asking?
Yes. Would you still have Canadian stores to do in fiscal 2020 possibly?
Yes. Yes, for sure. As you know, we have more than 80 large formats. And having done, let's say, 20-some odd in -- after fiscal '19, I mean, we will still have quite a few. And the plan right now is to, obviously, continue to refine our design and our concept as we go along, but to certainly to continue to renovate. Because I mean, the results are there. And we believe that the return on this investment is very high. So we will definitely -- it is planned right now that we'll definitely continue.
So is it possible that you could retrofit, renovate every single large-format store in Canada?
I mean, right now, we are starting with the stores that give us the biggest bang for our buck, obviously. But I mean, why not? I mean, this is -- this certainly is the plan, is to really -- is to reimagine our large-format network. And it would make sense to apply this concept to most of them, certainly.
Okay. So going back to the quarter, if you look at the revenue growth, obviously, it's quite strong, quite good. I'm just wondering, how much of that has been driven by these new store concepts versus just growth across the entire chain of stores?
Well, right now, as our new renovated stores, there is -- as I said, there is 6 of them. So it's -- there is, obviously, some growth coming from that because it's -- every store is performing really, really well. That being said, with 6 -- with only 6 stores having been done, it's not a huge contribution yet. But as we roll this out, this is going to become very material. I mean, don't forget that as we are rolling it out, I mean, there's a period of, how would I call it, of disturbance as well, right? Because as we renovate store, there is a negative impact on our sales as we renovate these stores. So at first, we will have some pickup, but the pickup will accelerate as we renovate more stores. And the sales pickup start outweighing the disturbance, I'll call it.
So in the past, the EBITDA has covered CapEx.
Yes.
You're going to do 20 stores next year. It's -- do you envision EBITDA covering CapEx?
Not necessarily. I mean, we have a very strong balance sheet. We believe very strongly in the renovation and reimagining of these stores. So it has been this company's approach, and we will continue to be very prudent in our investments. But it would certainly make sense for us to temporarily, maybe over a year or 2, to invest a little more than our EBITDA in these projects that bring in a very high return on capital.
So when you talk about a high return on capital from these new stores, can you tell us what that return in capital is that you're seeing? Is it 15%, 20%? Is it double digit? Is over 20 -- any indication there?
It certainly is double digit, high double digits of -- well, yes, double digits in the -- not in the very low double digits, but I'd rather not quote -- well, I don't think we've quoted this, and I'm not comfortable quoting a specific number. But in the numbers of that you've thrown out, your -- depending on the store. Because some of our larger stores have maybe a higher return in some cases than some of the smaller stores. But we're definitely talking about very -- more than double digit, and in certain cases, very high return on capital investment.
Okay. So if you just look at your SG&A line in the past, you've always thought that it's possible to lower the SG&A line, look for efficiencies and so on. Is that still your belief, that you could maybe reduce your SG&A going forward?
Yes. Well, there -- yes, absolutely. It is still our belief, and we have -- this is something that we have -- we must continuously work on. There'll be temporary periods of, call them, investments. But certainly, long term, this is -- there's no change in that approach, and we will continue to work on that for sure.
And so just my last question is, when do you expect the New Jersey store to open?
Well, we had announced sometime this year. As you know, we tend not to open stores past September. So right now, the plan is to -- I mean, we're looking at sometime late summer, I'll call it.
[Operator Instructions] There are no further questions at this time. Please proceed.
Okay. Thank you very much, everybody, for accommodating us on this later-than-usual time. And thank you for your attention today. We appreciate you calling in and discussing our results with us. We will -- we look forward to reconnecting next quarter. Our annual results will be announced on or around May 29 of this year. So thank you, again, for your support, and have a good evening.
Ladies and gentlemen, this concludes your conference call today. We thank you for participating, and ask that you please disconnect your lines.