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Bookstores are dead? Indigo's steady results make its stock worth a second look

A girl carries her dolls at the American Girl boutique in the Indigo store at Yorkdale Shopping Centre in Toronto. Last quarter, 39.5 per cent of Indigo’s revenue was generated by general merchandise such as gifts, electronics and toys.

Peter Power/The Globe and Mail

Norman Rothery is the value investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.

The antics of swashbuckling shareholder activists take centre stage in Jeff Gramm's Dear Chairman. The recent book tells the tale of activism through the decades and provides a good deal of entertainment and insight along the way.

But rather than focusing on Mr. Gramm's book, give a thought to where one might buy it. It's time to re-examine the notion that bookstores are dead and to give Indigo Books & Music Inc. a second look.

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It is true that book retailers have had a hard time of things. After all, online competition from the likes of Amazon.com Inc. – and the shift to reading on various digital platforms – has pushed U.S.-based bookstores to the edge and knocked a few, such as Borders Group, into bankruptcy.

Indigo weathered the storm thanks to the able management of chief executive officer Heather Reisman who moved her firm beyond books and into the gift, electronics and toy markets. While Indigo's sales have remained fairly flat over much of the past decade, they've fared a good deal better than most booksellers.

Shareholders cheered Indigo's latest quarterly performance. The firm's comparable store sales jumped 15 per cent on a year-over-year basis during the important holiday season. Revenue over the past 12 months clocked in at $960-million. (All figures in Canadian dollars.)

Breaking the sales down, 57.8 per cent of the firm's revenue came from books and similar items last quarter. But 39.5 per cent was generated by general merchandise such as toys and lifestyle items. Interestingly, the fraction of sales related to e-reading fell to 1.2 per cent this time around from 2 per cent in the same quarter last year. It appears that the printed word is, thankfully, not quite dead yet.

Speaking of e-reading, Ms. Reisman's decision to sell the firm's Kobo e-reader business in early 2012 was brilliantly timed and landed the company a big pile of cash. That pile has grown larger since then and it's a big reason why Indigo's stock shows up on deep-value screens.

The market currently figures the company is worth about $384-million based on its market capitalization. But the company has very little in the way of long-term debt and an enterprise value (market capitalization plus debt less cash) of about $74-million.

Indigo's enterprise value is less than three times its earnings over the past four quarters of $28-million. That's extraordinarily low and largely the result of the $312-million worth of cash (and equivalents) the company has on its balance sheet.

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It is important to note that Indigo's cash levels vary seasonally and typically hit a high point during the holiday season. But the firm's cash hoard didn't fall below $176-million over the past year and – barring a spending spree or disaster – the low point will likely be closer to $200-million this year.

As a result, a good chunk of that cash (perhaps more than $7 a share) doesn't appear to be necessary for the firm's operations and could safely be sent to shareholders without affecting its business. That's not an insignificant sum.

Shareholders might think about writing a friendly "Dear Chairwoman" letter to Ms. Reisman imploring her to reinstate Indigo's dividend. After all, shareholders of modest means could use a little extra walking-around money. They might even spend it munching on cookies and sipping on lattes in one of their firm's cafés.

More forceful action, of the sort undertaken by Monty Python's band of elderly accountants at Crimson Permanent Assurance in the movie The Meaning of Life, is out of the question because Ms. Reisman has firm voting control of the company. But on the whole, that's been a good thing over the years and Indigo's stock is worth considering even without a dividend.

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