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Edited Transcript of IDG.TO earnings conference call or presentation 14-Aug-19 1:00pm GMT

Q1 2020 Indigo Books and Music Inc Earnings Call

TORONTO Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Indigo Books and Music Inc earnings conference call or presentation Wednesday, August 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Heather M. Reisman

Indigo Books & Music Inc. - Founder, Chairman & CEO

* R. Craig Loudon

Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain

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Conference Call Participants

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* Robert Gibson

PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst

* Siddhant Dilawari

Cormark Securities Inc., Research Division - Associate of Institutional Equity Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to Indigo Books & Music Q1 analyst conference call. (Operator Instructions) Note that the call is being recorded on Wednesday, August 14, 2019. And I would like to turn the conference over to your host, Mr. Craig Loudon, Chief Financial Officer. Please go ahead, sir.

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [2]

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Good morning, and thank you for joining us to review Indigo's first quarter fiscal 2020 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 that 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 21, 2019.

This conference call may contain forward-looking statements, and to the extent that it does, we refer you to the 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.

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Heather M. Reisman, Indigo Books & Music Inc. - Founder, Chairman & CEO [3]

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Good morning, everyone, and thank you for joining us. On our last analyst call, we noted the industry headwinds that challenged our fiscal 2019 results. Many of these pressures do remain present. That said, we have strategically moved to be far less promotional. While this tempered sales, it has already shown some positive results in margins, execution on margin will drive us back into a profitable position. We are also working on a number of initiatives that will impact the growth potential of the business, and while we are doing that, we remain extremely focused on cost management and productivity initiatives. I think it is worth noting that while there has been pressure on the business, our market share in the book business remained very strong, confirming that Indigo customers choose to remain with us.

I would now like to hand it over to Craig to speak to financial results in detail.

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [4]

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Thank you, Heather. The results we are discussing are for the 13 weeks ended June 29, 2019. Comparative figures have been provided for the 13 weeks ended June 30, 2018. This is our first quarter reporting under IFRS 16, the new leasing standard.

The company's financial performance in the first quarter was materially impacted by the adoption of IFRS 16. Our financials on a reported basis and discussed today include the adoption of IFRS 16. However, we have also provided certain metrics for fiscal 2020 excluding the impact of the new standards to assist with your analysis.

Revenue was $192.6 million for the quarter, which was $12.8 million less than the first quarter last year. The top line decline was a result of a deliberate shift to reduce promotional and discounting activity to improve profitability. This focus on profitability and continued focus on disciplined inventory management resulted in higher full-price sell-throughs and the margin rate improvement of 0.8% for the period. The company's fiscal results continue to be impacted by softer consumer spending in the nonessential market space and the mature general merchandise assortment generating lower demand. There is an inherent time-to-market life cycle related to changes in our assortment that we are working through to meaningfully change course and will provide a further update in the coming months.

Total comparable sales, including online, decreased 7.6%. Comparable retail store sales for the quarter decreased by 6.5% in superstores and 2.4% in small-format stores, primarily as a result of the company's planned efforts to reduce promotions. The online channel comparable sales decreased by 14.8% for the quarter. The reduction in promotional activity had a larger impact on the online channel given that the online customer has a stronger price sensitivity. Additionally, while we continue to expand the breadth of products offered in the online channel, we refined our assortment of low-value, low-margin items to improve profitability.

Gross profit decreased by $4 million driven by lower revenue, partially offset by margin rate improvements. Overall, operating, selling and administration cost decreased by $17.1 million compared to last year. Excluding the IFRS 16 impact, these expenses decreased by $0.5 million, primarily due to the company's cost-cutting initiatives and improvements in underlying operating performance, partially offset by higher severance costs associated with the reorganization of our workforce, which began in the fourth quarter of last year.

For the quarter, adjusted EBITDA increased by $13.1 million. Excluding the IFRS 16 impact, adjusted EBITDA decreased by $3.5 million. Lower adjusted EBITDA was driven by lower sales as a result of the company's strategic shift toward lower promotional activity and the laser focus on profitability, partially offset by the margin rate improvement achieved. Consequently, net loss for the first quarter was $19.1 million compared to a net loss of $15.3 million last year. The impact of adopting IFRS 16 for the quarter was an earnings improvement of $0.5 million.

Capital investment in the first quarter of fiscal 2020 was $5.3 million compared to $22.9 million for the same period last year. The decrease was a result of the completion of the company's intensive capital investment plan in fiscal 2019 to implement changes across Indigo's retail outlets as well as investments in digital and supply chain.

We are observing the significant changes implemented last year and will hold off on further investment until we've assessed the customers' response to these initiatives. We ended the quarter with $90.3 million in cash and short-term investments while having no debt.

At this point, we would like to open the call for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question will be from Bob Gibson at PI Financial.

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [2]

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Hello. Bob?

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [3]

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Wonder if I could get any color on what his thoughts are?

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [4]

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Sorry, we missed, Bob, what you said. It was cut off.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [5]

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Okay. Nathe, your new Chief Creative Officer.

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [6]

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Nathan Williams, yes.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [7]

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So any color on what he's thinking or what he's doing?

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [8]

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Heather, would you like to take that?

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Heather M. Reisman, Indigo Books & Music Inc. - Founder, Chairman & CEO [9]

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So he's only been in the job for a couple of weeks. And so he's got a large ambition for the company, but I think we're going to have to give -- usually, it takes about a 9-month cycle minimum to start to see what the evolution in the product is. We have product still in the pipeline that he will be able to influence somewhat, but the real new rollout of his product will be between approximately 9 months from now.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [10]

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Okay, great. The New Jersey store, it's almost been a year. Any color on what you're thinking?

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Heather M. Reisman, Indigo Books & Music Inc. - Founder, Chairman & CEO [11]

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Yes, I think in terms of doing more stores you mean? Yes. Because we're doing all this work on sort of revising our assortment, we're going to hold off anymore new stores in this year. We're going to really look to advance the overall presentation to the customer. And once that happens, we'll be in a better position to look at what our U.S. strategy is. We're not pulling away from the ambition at all. We just feel it is extremely important to get this sort of refocus of the core verticals to really do what we want them to do.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [12]

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Okay. And maybe a little color on where you think the consumer is now versus last quarter and this sort of shopping patterns?

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Heather M. Reisman, Indigo Books & Music Inc. - Founder, Chairman & CEO [13]

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Yes. Look, there's no question that the intensity with which Amazon is in the market is huge. And we have several categories that are up against them, books, toys, to some extent some of the home office stuff that we do. So is that having some impact in general in the Canadian economy? Yes, it's having an impact.

Consumer -- other than that, other than the way they will approach online shopping, I don't have a huge amount to say. We are seeing our customers come in, but they are spending a bit less. So if that's some indication? It's hard for us to tell -- to really comment because we have so cut back on promotional activity, which we needed to do, I don't know if you remember last year, but the delay in the store program meant we had a lot of extra goods that now we had to promote them to move them through the stores we had. And customers get used to that, and we just -- we didn't buy inventory that way this year.

So our customers are coming in. They are buying a bit less. That's what we see. As we take away all of that low-price stuff, it has some impact on our sales. Are we saying this is because customers coming back? I think it's more because we've cut the promotions back. We've got to live through it this year. We just have to live through it. I can't say -- they're coming in. So yes, I'm hesitant to say that it's a consumer problem frankly, if that's what you're asking.

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Robert Gibson, PI Financial Corp., Research Division - MD, Head of Research & Consumer Products Analyst [14]

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Right. Okay. Perfect.

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [15]

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Yes. Bob, just a little more color though on sales margin trade-off. We're actually quite pleased with the way that worked out. In the end, that sales decline probably cost us something like $8 million in margin dollars, yes.

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Heather M. Reisman, Indigo Books & Music Inc. - Founder, Chairman & CEO [16]

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You are talking with the online sales, yes.

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [17]

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Not just even overall. $8 million in margin from sales, but we made up $6 million in margin rate performance. So we're actually quite pleased with that trade-off because that also allows us to keep operating costs down through driving less volume through the network.

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Operator [18]

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Next question will be from Sid Dilawari at Cormark Securities.

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Siddhant Dilawari, Cormark Securities Inc., Research Division - Associate of Institutional Equity Research [19]

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I guess just a follow-up on online sales. When we checked last quarter just stacking you guys up against Amazon, your book pricing with the discounting was pretty similar to Amazon, but I believe with reduced discounting activity you guys are probably a little bit more expensive than Amazon...

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Heather M. Reisman, Indigo Books & Music Inc. - Founder, Chairman & CEO [20]

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Sorry, with what? I just didn't hear your question. Our prices stacked up against Amazon but?

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Siddhant Dilawari, Cormark Securities Inc., Research Division - Associate of Institutional Equity Research [21]

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But now with reduced discounting activity, do you guys still stack up well against Amazon in terms of books?

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Heather M. Reisman, Indigo Books & Music Inc. - Founder, Chairman & CEO [22]

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Yes. We didn't change any discounting on the books. The books are exactly the way they were. We've always been pretty much at parity with Amazon on where they -- in fact at parity with Amazon to the best of our knowledge on where they are. Where we reduced the discounting was on a lot of general merchandise product. So books, we're still at parity. And for the most part on toy, we try and be at parity as well. Occasionally, they'll do something below cost. We just aren't prepared to do that. But on the -- what we consider to be mass product, we recognize that in the market the consumers are going to expect pricing to be the same as Amazon.

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [23]

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And Sid, just to be clear, the discounting comment also relates to retail. So last year given that some of our challenges of late renovations, we had a lot of marked down product in our physical retail stores, and that is not the case this year. In fact, inventory is down $16 million year-over-year and that's predominantly general merchandise decrease in inventory.

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Siddhant Dilawari, Cormark Securities Inc., Research Division - Associate of Institutional Equity Research [24]

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Right. Okay. And then just a quick one on retail sales since we're talking about it. How are the newly renovated stores performing? Are the margins coming in as expected? Or is the software discretionary spending kind of impacting the top line of these stores as well?

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [25]

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I think it's a mix and it's location-specific, like anytime you engage in any real estate activity, we have some that are knocking absolutely out of the park, and we're thrilled. We have some that are meeting expectations and some that are below. But again, it's really case-specific, for example, our Bay & Bloor store continues to struggle, but that's mainly because the Manulife Centre is still under construction, and it's very hard to access and has been ripped apart for some time. We're hoping the end is near on that, and that we'll be able to get back to normal. But it's really site-specific.

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Siddhant Dilawari, Cormark Securities Inc., Research Division - Associate of Institutional Equity Research [26]

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Right. And then in terms of EBITDA for the full year, should we be expecting to see a normalized EBITDA for this year? Or is that sort of fiscal 2021 event?

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [27]

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As I'm sure you work with David, it's real tough. So tell David, we don't provide forward guidance on that. I think what we're saying is, we still see some headwinds, but I think that's all we're going to say on that point at this juncture.

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Siddhant Dilawari, Cormark Securities Inc., Research Division - Associate of Institutional Equity Research [28]

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Okay. And then, I guess, just last one for me. I noticed $40 million cash burn for the quarter. Can you provide some color on that? Should we be expecting similar cash burn throughout fiscal '20? Or is that just sort of onetime item?

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [29]

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I think what you're looking at is from quarter-to-quarter. I think you'll find year-over-year is more meaningful. That is a general pattern in our business. Just as post-holiday, as spenders get paid, this tends to be a lower point of cash during the year. Year-over-year, yes, cash is down, but we've spoken to that on past calls. That was related to last year's renovation activity. But no, as we stated on our last call, our goal this year for capital investment is to be under $20 million, and that is still our plan.

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Operator [30]

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(Operator Instructions) And at this time, Mr. Loudon, it appears that we have no other questions. So I would like to turn the call back over to you, sir.

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R. Craig Loudon, Indigo Books & Music Inc. - CFO & Executive VP of Supply Chain [31]

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Thank you for your time and attention today. We appreciate you calling in and look forward to reconnecting on a quarterly basis. Our second quarter results will be announced on or around November 5. Thank you again for your support, and have a great day.

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Operator [32]

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Thank you, sir. Ladies and gentlemen, this does indeed concludes your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.