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Indigo shares plunged 18 per cent after an announcement that the bookstore is suspending its dividend.

Fernando Morales/The Globe and Mail

Investors are turning the page on Indigo Books & Music Inc. after the struggling retailer suspended its dividend to help pay for an aggressive transition away from its dying bricks-and-mortar bookstore model.

Indigo shares plunged 18 per cent on Wednesday after the company said it was pulling the payout, which had yielded about four per cent, and reported a wider second-quarter loss on lower sales and higher costs.

Some investors are choosing not to stick around as Indigo redirects approximately $11-million in annual dividend money towards its conversion into a "lifestyle company" focused less on books and more on gifts and toys.

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Few observers, though, dispute that the company is doing what it must to adjust to the digital age. "I don't think they have much choice," said Brian Pow, an analyst with Acumen Capital Finance Partners Ltd.

Indigo's plan to revamp its stores is a response to falling margins from its core book business, a result of the continued rise in online and digital sales. The company behind the Chapters, Coles, Indigo and the World's Biggest Bookstore banners is also facing increased competition as more U.S. discount retailers enter the Canadian market.

Indigo has been remodelling many of its stores and offering new products, including the popular American Girl line of dolls and books that it recently signed on to sell. On Wednesday, the company said it plans to step up its move away from books and into other products.

Suspending the dividend to pay for the changes is "the right thing to do," Indigo founder and chief executive Heather Reisman said in a letter to shareholders.

The company first offered a dividend in 2009 after paying off the debt from its acquisition of Chapters. Back then, the company said, a dividend made sense at "a time of significant earnings and very much prior to the advent and impact of the digital reading revolution."

While Indigo is now being forced to rethink its business, investors are considering whether to wait for the results.

Indigo shares were already under pressure before Wednesday's news. The stock price had been flat so far this year even as the broad market had risen. On Wednesday, the shares dropped $1.98 to $8.75, their lowest level in almost 14 months.

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RBC Dominion Securities Inc. analyst Tal Woolley lowered his target price to $9 from $11 and maintained a "sector perform" rating, warning the hike in spending will put pressure on future cash flow and results.

"Early indications on new merchandising programs show some promise, but the accelerated investment and weakening results raise the near-term risk profile," Mr. Woolley said in a note.

Indigo said its fiscal second-quarter revenues fell 3.3 per cent to $179.4-million. During the same period last year it had nine more stores and sales were driven by sales of the wildly popular Fifty Shades and Hunger Games trilogies. Without those blockbuster titles, book sales dropped, although the decline was buffered by what the company called "double-digit growth" in lifestyle, paper and toy sales.

The company reported a net loss of $10.1-million or 39 cents per share for the quarter compared to a loss of $4-million or 16 cents for the same time last year, which it blamed on lower book sales and higher costs. Cost of operations came in at $130.8-million, up from $129.9-million last year, while selling, administrative and other expenses jumped by $4.3-million to $23.1-million.

Ms. Reisman has a history of adapting to the changing retail landscape, as demonstrated by her successful launch of the Kobo e-reader business. Bringing on board such brands as American Girl and Poppin, a colourful line of office supplies, should help boost profits longer-term, said Octagon Capital analyst Robert Gibson.

"I like these new departments," said Mr. Gibson, who has a "buy" on the stock, yet lowered his target price Wednesday to $11.50 from $12.25 after the stock's drop. "The book part of the store will continue to decline in sales, so you've got to replace it with something else."

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