Costly start in e-books

INDIGO BOOKS & MUSIC INC. $15 (Toronto symbol IDG; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 24.7 million; Market cap: $370.5 million; Price-to-sales ratio: 0.4; Dividend yield: 2.9%; SI Rating: Average) also hopes to profit from growing sales of e-books. So far, however, e-books are cutting into its profit.

In December 2009, the bookseller launched its Kobo e-book downloading web site. In May 2010, it started selling its own Kobo e-book reader.

In its first quarter, which ended July 3, 2010, Indigo spent $3.2 million on Kobo development, and $1.0 million more on marketing and promotions. These start-up costs swelled Indigo’s losses in the quarter to $5.3 million, or $0.21 a share. A year earlier, it lost $2.8 million, or $0.09 a share. However, Indigo earns most of its profit in its third quarter, which includes the Christmas shopping season, and generally loses money the rest of the year.

Sales rose 5.5% in the latest quarter, to $204.3 million from $193.6 million. Kobo accounted for about half this increase. The rest came from a 1.5% same-store sales gain at its 96 superstores. Same-store sales at the 149 mall-based stores fell 0.7%; online sales were unchanged.

Kobo faces strong competition from Amazon’s Kindle device and the new Apple iPad. However, it costs less than these other devices and can handle more e-book formats.

Indigo is a buy.