Without more clarity, we’ll keep turning the page on Indigo Books and Music

By: Benj Gallander and Ben Stadelmann

Sometimes we follow a stock for years and never bite the buying bullet. On occasion we wish that time could be rolled back as the stock flies so we could get in. But then there’s a stock like Indigo Books and Music Inc. IDG-T. We’ve turned the pages on it numerous times but never took it to the checkout. A good call, it appears.

Indigo was the brainchild of founder Heather Reisman, she being half of a power couple with Gerald Schwartz, chief executive officer of private equity firm Onex Corp. She started the company in 1996, with its first box store, Indigo Books, Music and More opening in Burlington, Ont., in 1997. The company quickly became the dominant player in the industry in Canada, with the takeover of Chapters consolidating its position. The stock price took off with the perceived potential, doubling its IPO price to touch over $34 in 1999.

But alas, problems brewed with the advent of technology via the internet and a megapowerful competitor called Amazon. Still Indigo managed to hold it together, and after falling below $4 in early 2000, the stock price soared to $20 in 2018. It has since retreated dismally to under a toonie. Does it now represent a buying opportunity?

Last month, Ms. Reisman announced that she will be stepping down as executive chair and director in August. She had already given up her CEO mantle in 2022, passing the baton to Peter Ruis. Nothing against Mr. Ruis, but losing Ms. Reisman and her knowledge base does not bode well for the enterprise.

Even worse, four other directors resigned at the same time. A massive exodus like this often indicates major problems and should make investors wary about what the heck is going on. One of the directors, Dr. Chika Stacy Oriuwa, said her resignation was because of a loss of confidence in the board and because of mistreatment. Not good. Three new directors just joined the board. This transition will place more pressure on Mr. Ruis.

Numerous bookstores in North America have disappeared over the past 20 years. South of the border, some of the bigger ones include Borders Books, Crown Books and Waldenbooks. Meanwhile, on the Canadian side, McNally Robinson declared bankruptcy although it operates three stores today. This is not an industry for the faint of heart.

Indigo has been a tech leader in the past. The company launched its first eReader in 2010, which morphed into Kobo. It sold it to Rakuten in 2012 for US$315-million, a plump win indeed. Another windfall like that would be helpful, but there is no obvious candidate,

And tech is not always a friend. In February, the company was hit by a ransomware attack. That knocked down revenue and profitability, as payments could not be processed for three days, and it took four weeks to fully restore the website. Modern technology is wonderful, except when it is not.

Meanwhile, fighting to stay relevant when much of book vending went online, Indigo expanded its product line dramatically. New market segments it has embraced include wellness, living, fashion, toys and gifts, with a larger focus on babies and kids.

Some in the industry looked down on this shift from the major focus on books, but it appeared necessary to drive traffic to the stores. Part of that was a long-term relationship with Starbucks to make outlets more inviting, but the coffee chain has departed. The replacement in some stores is Canadian chain Good Earth Coffeehouse, currently planning on opening more than a dozen locations.

Indigo can still make money. In the third quarter, normally its strongest, net earnings were $34.3-million, though sales shrank 1.9 per cent year over year. But the loss for fiscal 2023 was $49.6-million, compared with earnings of $3.3-million last year. Ouchie mama. Going forward, profitability is a major question mark.

At this point, with so much uncertainty, it seems like a good time to watch developments from the sidelines with the thought to perhaps buy during tax-loss selling season at the end of the year. The price could droop further as people might dump it then. Certainly, there would have to be more clarity before we add this to our portfolio.

Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter