Indigo reports 70 per cent drop in quarterly profit as it borrows more money from controlling shareholder

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Indigo Books & Music Inc. IDG-T reported a 70-per-cent decline in third-quarter profit, and is borrowing more money from its controlling shareholder, after the struggling retailer faced a sales slump during the crucial holiday shopping season.

The third quarter is an important one for Indigo, which is very dependent on holiday sales. The company makes a disproportionate amount of its revenue for the year during this time.

On Thursday, the Toronto-based retailer reported net earnings of nearly $10-million or 36 cents per share in the 13 weeks ended Dec. 30, 2023, compared with $34.3-million or $1.23 in the same period the prior year.

Sales fell both in Indigo’s book business and in its general merchandise, where the stores were “missing key top-selling holiday products,” chief executive officer Heather Reisman said on a conference call on Friday to discuss the third quarter earnings.

Indigo reported the results one week after the company announced it had received a proposal from its largest shareholder, Onex founder and chairman Gerald Schwartz, to take the company private.

Indigo has been struggling and has lost money in four of its past five fiscal years. In the first half of this fiscal year, the Toronto-based retailer reported a $50.9-million loss. The company recently laid off employees at its head office as it pursues a turnaround plan.

On Friday’s call, Ms. Reisman said she is confident in that plan. “That said, it will take time before we begin seeing our full potential show up in the numbers,” she said.

The layoffs are now complete and will result in approximately $10-million in annualized cost savings, chief financial officer Craig Loudon said on the call. Indigo spokesperson Madison Downey declined to answer a question on Friday about how many jobs had been cut. Indigo has reported $6.2-million in non-recurring expenses so far in this fiscal year, which is primarily related to severance for employees laid off during the restructuring.

Indigo has been scaling back its costs in other ways, and is on track to achieve roughly $15-million in annualized savings, Mr. Loudon said. The company has reduced its retail labour costs, cut back on non-essential spending and found “efficiencies” at its distribution centre, according to the third-quarter report. Indigo also temporarily reduced its marketing spending during the third quarter.

The company took a hit to its profitability in the quarter as it sold off what Ms. Reisman called “unnecessary inventory” at a discount.

“Not all of the assortment was consistent with our brand,” Ms. Reisman said. In an e-mail, Ms. Downey declined to say which product categories are part of the effort to “right-size” the assortment. On Indigo’s website, a range of items including toasters, leggings, dumbbells, waffle makers, bubble bath, acne treatment and throw blankets are listed at deep discounts.

Indigo’s third-quarter revenue declined by 12 per cent compared with the prior year, to $370.6-million. Print sales were down by 8 per cent, while general merchandise sales decreased by 18.5 per cent.

Executives blamed the lacklustre third-quarter results partly on the lingering effects of a ransomware attack that hit Indigo a year ago, resulting in millions of dollars in lost sales. The company also incurred costs including legal fees and spending to bring its systems back online, totalling $6.5-million so far. Indigo has received $1.3-million in insurance proceeds related to the attack, and is continuing to process claims with its insurer. The company’s cyberinsurance provides for maximum coverage of roughly $10-million, Mr. Loudon said.

The “premature launch” of a new e-commerce site last August also affected sales, Ms. Reisman said. When asked on the call what the problems were with the digital launch, she replied, “I don’t think that this is appropriate, for us to go into the full details here.”

Online sales fell by 28.5 per cent to $76.5-million in the quarter. Indigo’s brick-and-mortar store sales – which include orders placed online for store pickup – declined by 8.2 per cent to $280.9-million.

In addition, Indigo has been affected by a dampened consumer environment. Canadians suffering under the weight of inflation and higher interest rates have been cutting back on non-essential purchases, and have been reluctant to buy items at full price. That has weighed on Indigo’s profitability.

Last summer, Mr. Schwartz’s personal holding company Trilogy Retail Holdings Inc. provided a $45-million credit facility to Indigo, which has now been extended with an increased principal credit amount up to $70-million. The agreement includes the option to increase that amount by $10-million with Trilogy’s consent. According to a company press release, the money is being used to finance Indigo’s “ongoing working capital needs and general corporate purposes,” as well as restructuring costs and other capital expenditures.

Mr. Schwartz has offered $2.25 in cash per share to acquire the remainder of Indigo stock that he does not already own. Indigo shares closed Friday at $2.07, about 40 per cent higher than last week, before the offer was disclosed.

Mr. Schwartz sits on Indigo’s board and is married to Ms. Reisman. Together they control 60.6 per cent of Indigo’s shares. Mr. Schwartz’s holding companies, Trilogy Retail Holdings Inc. and Trilogy Investments LP, own roughly 56 per cent of Indigo’s outstanding shares. The rest are held by Ms. Reisman’s personal holding company HRON Canadian Investments Ltd. and other “joint actors,” according to a press release issued last week.)

Indigo faced significant upheaval in 2023, in addition to last February’s cyberattack. In June, four of Indigo’s 10 board members resigned, with board director Dr. Chika Stacy Oriuwa saying she had experienced “mistreatment” at the company, and that she had lost confidence in the board’s leadership.

On the same day those resignations were announced, Indigo said Ms. Reisman would step down as executive chair of the board later that summer. But after chief executive officer Peter Ruis also left Indigo, Ms. Reisman returned as CEO last September, a post from which she had retired a year earlier.

Since then, Ms. Reisman has committed to restoring the company to profitability.