Indigo Books and Music Inc

TSX:IDG

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Indigo Books & Music Inc. Financial Year 2021 Year-end Analyst conference call. [Operator Instructions] This call is being recorded on Wednesday, June 2, 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 2021 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 June 9, 2021. This conference call may contain forward-looking statements. And to the extent that it does, we refer you to our cautionary statement regarding any 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. It is almost redundant to say that this year will be remembered as a watershed moment in history, a turbulent time that will prove to transform so much of who we are. I am proud of the ways in which Indigo has demonstrated resilience and resourcefulness throughout the course of this pandemic and pleased to report that our customers adapted with us, embracing indigo.ca and our express pickup and curbside offerings. Buoyed by the exceptional triple-digit growth in online, the in-year delivery of enhanced omnichannel capabilities and a renewed strength in our core book business, net revenue decreased just 5.5% from the prior year. Against draconian govern-mandated store closures in our largest province, Ontario, and capacity constraints across the country that meaningfully disrupted our business, including during the all-important holiday season, we feel this is a remarkable result. Online penetration more than doubled, partially offsetting the sales losses from a severely restricted retail business. This performance is a testament to the agility and dedication of the Indigo team, who successfully pivoted to capitalize on the consumer shift to full e-commerce shopping, and we delivered transformative growth. Amidst the complexity of this global health crisis, we also successfully launched our new home brand, OUI, which was well received by our customers with many items selling out. In addition to absorbing some COVID-19 downside, this launch demonstrates the success of assortment expansion as a growth lever for our business as we look forward to a post-pandemic recovery. This expansion will be buttressed by further investment in digital and omni experience for our customers initiated this past year and already well underway. Back to speaking on fiscal '21, margin pressure from the need to clear through retail inventory after waves of store closures, paired with unusually elevated shipping costs, driven by the channel shift, impacted sales to adjusted EBITDA. With the addition of Peter Ruis as President and a healthy balance sheet with no outstanding debt, we look forward to a return to profitability in fiscal 2022.

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

Thank you, Heather. The results we are discussing are for the 53 weeks ended April 3, 2021. Comparative figures have been provided for the 52 weeks ended March 28, 2020. We have also provided certain metrics for fiscal 2021, but exclude the impact of the 53rd week to assist you with your analysis. Revenue for the full year decreased $53 million or 5.5% to $904.7 million from $957.7 million in the prior year. On a normalized 52-week basis, total revenue decreased 7.1% compared to the same period last year. This decline reflects the financial impact of government-mandated store closures and customer capacity restrictions and impacted all 177 stores in fiscal 2021. To put this into greater perspective, stores in the Greater Toronto area, collectively, our biggest market, base closures for approximately 6 months' time, including the critical holiday sales period. As a result of temporary store closures from COVID-19 and strict social distancing requirements, limiting capacity in stores and open markets, we believe that comparable sales, which, in the past, has been a key performance indicator, is no longer meaningful to evaluate performance. Instead, we're focused on total revenue, as discussed, as well as online growth and omnichannel fulfillment trends. Online channel revenue more than doubled with growth of 127% for the 53-week period ended April 3, 2021, sustaining the momentum realized since the beginning of the pandemic. Online revenues still experienced triple-digit growth on a normalized 52-week basis at 124.5%. The company converted a significant number of existing retail customers to its digital platforms as well as acquired a new online customer base with over 1 million new customers shopping on indigo.ca in fiscal 2021. The retail channel, which is inclusive of orders fulfilled through omnichannel express pickup, decreased by 34.1% for the 53-week period ended April 3, 2021. On a normalized 52-week basis, retail revenue decreased 35.5%. This reflects the severe impact of government-mandated store closures as discussed. We enhanced Click & Collect services launched ahead of our Q3 holiday peak. The business was able to activate retail inventory in closed markets, satisfying customer demand and alleviating some pressure from the online fulfillment centers. These enhanced omnichannel capabilities peaked at 35% of e-commerce demand during a critical holiday period of December sales and will continue to be a pillar of our omnichannel strategy as customer expectations evolve post-pandemic. Cost of sales increased by $14.3 million to $567.9 million for the 53-week period ended April 3, 2021. As a percentage of total revenue, cost of sales increased 5% to 62.8% compared to 57.8% last year. This was primarily a function of higher shipping costs from the online channels penetration increasing to 41% and include the elevated volume-driven fulfillment costs during store closure periods. Excluding online shipping costs, cost of sales decreased by $22.1 million for the 53-week year. As a percentage of total revenue, this represents an increase of only 0.8% to 55.9% compared to 55.1% last year. Retail margin rate performance remained flat to last year, highlighting the company's ability to generate full price sell-through, despite isolated pressures from mandated store closures. The online channel delivered the strongest merchandise margin rate to date as a result of disciplined inventory management, lower online promotional activity and efficiencies realized in the company's online fulfillment process. As the online channel has historically experienced lower margins, these efforts lessen the impact of the noted shift to the online channel. This resulted in an increase to cost of sales as a percent of total revenue of less than 1%. Overall, operating, selling and administration costs decreased by $49.3 million to $296.4 million for the 53-week period ended April 3, 2021. The company recognized $16.6 million in occupancy expense support and $27.4 million in government payroll subsidies. These reductions were furthered by lower costs throughout the company's store network in response to the year-over-year decline in traffic, partially offset by increased costs in the company's online distribution network from the growth of indigo.ca. In line with significant COVID-19 headwinds and the associated adverse revenue impact, adjusted EBITDA decreased by $21.1 million to a loss of $28.3 million for the 53-week period ended April 3, 2021. As a percent of total revenue, adjusted EBITDA declined by only 2.3% to a loss of 3.1% this year, reflecting our ability to meet customers' demands despite relentless operational challenges, the extraordinary resilience of our Indigo teams and a deep affinity for the Indigo brand. The company recognized a net loss of $57.9 million for the 53-week period ended April 3, 2021, or $2.09 net loss per common share compared to a net loss of $185 million or $6.72 net loss per common share last year. The improvement in earnings was primarily a result of cycling over noncash impairment losses and the write-down of the company's deferred tax assets in the prior year. With no outstanding debt, a clean inventory position and cash of $84.9 million, the company is well positioned to see through the remaining COVID-19 uncertainty and the execution of our post-pandemic growth strategy. At this point, we would like to open the call for any questions.

[Operator]

[Operator Instructions] Your first question is from David McFadgen with Cormark Securities.

[David John McFadgen, Director of Institutional Equity Research]

A couple of questions. First of all, just on the store count, is this the new norm for the store count? I saw that there's a reduction in the small format stores. So I was wondering if you would reconsider expanding again once we're out of this lockdown or is this the new norm here?

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

So for some time now, we've been looking at our small format strategy. We were serving a number of very small communities. And as long as the business is doing extremely well, even though those were money losing, we could justify supporting them. But we had to make lots of meaningful decisions this year and in communities that cannot support a small format store, we have, in fact, withdrawn at the moment. Having said that, we are in the process of looking totally new at the whole role of retail and what role can stores play in this new truly digital omnichannel world. And so I wouldn't overread into that. I would say, yes, nonprofitable locations will be closed, but there's all kinds of new potential depending on how this strategy unfolds. So we are looking to have the right kind of physical coverage to fully support the customers in a rich omnichannel way. And we're -- we actually believe that the customer has changed and in many ways, that will work in the favor of our physical environment. And the more we can use those physical environments for both serving customers who are in for an experience and those who just want to pick up, the more we will do it. So it's a long answer to say, David. Yes, we deliberately withdrew from money-losing stores that we did not believe had a future as they were designed, where they were located, but we are fully relooking overall at our retail footprint in light of a whole new model of operating.

[David John McFadgen, Director of Institutional Equity Research]

Okay. And just following along that, obviously, the margins were negatively impacted in this quarter and in fiscal '21, just given the shift from retail to online. And I'm just kind of wondering, I don't even know if you guys have a read on it, but what you think the margins might be like, assuming all this lockdown behind us and the business kind of goes back to the new norm, whatever that is?

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

So of course, we're not going to comment specifically on margin unless -- following my comment, Craig wants to make a point. But this is what I think you need to understand or what I think would be valuable for you to understand about how we're thinking about the business. Last year, notwithstanding a bit of support on the -- from our landlords, which was very much appreciated, we essentially took a huge chunk of the business and put it into online, right? What we see moving for -- and so that had a huge impact on margins. What we see moving forward, because of the lots of new customers that we picked up to the online channel, is that online will continue to grow meaningfully, but that the in-store experience will also experience a meaningful growth trajectory, particularly because we are an in-store kind of retailer. So we see the opportunity for very much improved margins. Retail level margins have historically been better than online margins, although we are improving on the online side, and we'll continue to look for improvement. So all that to say, without stepping over a line that isn't appropriate, we believe that as the business emerges into this new world, we fully expect to see meaningful improvement in margin.

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

And David, I'll just add to that slightly. It's Craig. The real challenge has been more of the shift in that. Our online margins have greatly improved. In fact, contribution in that channel was up high single digits compared to where it was historically. So any net new revenue landing in the online channel is profitable. The challenge is when you temporarily take a large amount of volume that would have transacted in retail and will likely do so in the future, you move it out of that fixed cost network and those costs don't go away because you have long-term leases and obligations and then push it into a channel where there's variable costs. That's really what challenged the business this year. And we will see it correct, just like we did last summer when we opened for a little bit. We saw stores bounce back and online decrease a bit, but it still was well above historical levels.

[David John McFadgen, Director of Institutional Equity Research]

So you talked about returning to profitability in fiscal 2022, at least, we're optimistic on doing that. So I imagine that at the EBITDA level, the way you define EBITDA that you're hopeful that you'll get to positive EBITDA this year, right?

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

Correct, yes. That's correct. And certainly, starting the year off in Q1, this is publicly known, but over half our stores are currently closed with the ongoing Ontario shutdown. So we really need to get out of that and get back to business, but we'll do that as soon as we're allowed to.

[David John McFadgen, Director of Institutional Equity Research]

Yes. Okay. And then just on the cash position, I think you're kind of hoping these partway through fiscal '21 to have finished where the cash position, which was somewhat similar to what you started fiscal '21 with. And I was just wondering why or what you would attribute the lower cash position to just a function that we're dealing with this crazy lockdown scenario or...

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

Craig, can you comment on this? Because it is just that strange 53rd week and what it does, do you want to comment on that? And equal to equal, I think it's important to understand that point. It's very important.

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

Yes. No, that's a great observation, David. So because of the 53rd week, that pushed the end of both the fourth quarter and the year out of week. And consequently, we had 2 sets of publisher payments within 1 month, which normally wouldn't happen and also rent payments associated with the future quarter as well. So if I adjust for the 53-week and take it back to like-for-like timing to a 52-week year, the cash balance would have been $111 million, which is about $9 million off last year, which, given everything we faced, we're pretty pleased with. So we would never have to public -- set some publisher payments like that in 1 month. So that was to the tune of $20 million, a publisher -- extra publisher payments in the month and another $7 million of rent payments. So that's -- it's really not comparable the reported number, but that's the way we need to do it, given the 53rd week this year.

[Operator]

[Operator Instructions] There are no further questions at this time. Now I'll turn the call back over to you, Craig Loudon.

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

Thank you. Thank you for your time and attention today. We appreciate you calling in and look forward to reconnecting on a quarterly basis. Our first quarter results will be announced on or around August 13. Thank you, again, and have a good day.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.