Indigo looks to e-books for growth

INDIGO BOOKS & MUSIC INC. $12 (Toronto symbol IDG; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 24.5 million; Market cap: $294 million; Price-to-sales ratio: 0.3; SI Rating: Average) is Canada’s largest bookseller. Indigo operates 91 superstores under the Indigo, Chapters and World’s Biggest Bookstore brands. It also sells books online, and in smaller stores under the Coles, Indigo, Indigospirit, SmithBooks and The Book Company banners.

In February, Indigo launched a new web site called shortcovers.com, which lets users download electronic books and magazines to their computers and mobile devices. Although e-books are still evolving, U.S.-based bookseller Amazon.com’s Kindle reader and devices from other companies, such as Sony, have spurred interest in them. As well, shortcovers will help Indigo compete if Amazon decides to bring the Kindle to Canada.

Indigo’s losses in its first quarter, which ended June 27, 2009 rose to $0.09 a share from $0.05 a year earlier. That’s mainly because of the cost of launching shortcovers.com. As well, Indigo earns most of its money during the Christmas season, which falls in its third quarter. It typically earns little, or even posts losses, in the other quarters.

The company opened five new superstores during the quarter. These helped push up its sales by 1.5%, to $193.6 million from $190.6 million. On a same-store basis, sales rose 1.4% at the superstores, and 0.8% at smaller stores. Online sales fell 9.1%, mainly because the company stopped selling certain unprofitable items through its web site.

Indigo is a thin trader, which adds to its risk. However, it recently started paying a quarterly $0.10-a-share dividend, for an annual yield of 3.3%. The stock trades at just 9.0 times the $1.33 a share that Indigo will probably earn this year.

Indigo is a buy.