1. Indigo Books and Music Equity Research Report July 10th, 2015
Analysts:
Muneeb Ahmed
Justin Lao

2. Recommendation: HOLD - $13/Share Target
Executive Summary
Slow industry with increasing competition
Good Transformational Plan
Excellent Balance Sheet
Weak Canadian Dollar/Economy
Recommendation: HOLD - $13/Share Target
Key Stats
Share Price ( )
$10.84
Mkt Cap
$276.4 mln
Beta
0.52
S/O
25.5 mln
52 wk range
P/S (TTM)
0.3
EV/EBITDA (TTM)
3.76
EV/SALES (TTM)
0.27

3. Company Description Business Description Leadership
Largest Canadian retailer of books,
Diversifying into music, lifestyle products, toys, and electronics
Heather Reisman –CEO and Founder: Founded Indigo in Previously ran a consultancy firm, President of Cott Beverages.
Laura Carr (CPA) – EVP/CFO: Extensive experience with PwC. Short tenure with Indigo
Historical Timeline
1996 – Indigo was founded by Heather Reisman
2009 – Indigo spins off digital book assets into Kobo
2012 – Indigo sells Kobo to Ratuken ($140 mln)
2015- Indigo operates 218 stores and an online store.
Business Description

4. Historical Performance
Revenue Growth
EBITDA Margins

5. Industry Overview
Macroeconomics
Specialty Retail
Slowing demand for commodities as Chinese growth weakens
Weak 2015 Q1 and Q2 growth as a result of lower commodity prices
Growth projected to remain low
Retail extremely susceptible to slowdowns in the economy
Increased competition from discount outlets and online retailors
Industry Overview

6. Thesis Point #1 – Struggling Industry
Book Retailers Struggling
National Book Store Sales
Competition - eBooks, audiobooks, and online retailers
Revenue of all major book stores declining
Borders – Filed for chapter 11 (2010)
US Census Bureau
Competitors

7. Thesis Point #2 – Good Transformational Plan
Indigo’s Management has put in place various initiatives to help alleviate the effects of slowing industry
Optimizing Physical Stores
Driving Productivity and Efficiency
Galileo Project – pursuing over 150 initiatives to improve margins
Effects seen in 2015 with improved EBITDA margins
Diversifying product offering – lifestyle products, electronics, toys (American Girl)
Reducing floor space for books
Increasing Employee Engagement
Improving Omni-Channel Experiences
Improving interaction between retail stores with online purchases
In store pick ups
PayPal payment processor added
Social media interaction
Mobile applications
Improving Employee engagement
Indigo named top retail employer by Randstad Canada

8. Thesis Point #3 – Excellent Balance Sheet
Key Liquidity Statistics
Debt to Equity
0.53
Current Ratio
1.89
Quick Ratio
0.97
Cash Flow to Debt Ratio (2015)
14.255
Cash
$203 mln
Cash/Share
$7.96
Leaves room for management to pursue aggressive opportunities for growth without concern of insolvency
Share buy-backs
Dividends

9. Thesis Point #4 – Weak Canadian Dollar
Due to the rout in commodities, the CAD has dropped significantly in value
Most of Indigo’s suppliers are situated in the US and most prices are negotiated with vendors in US dollars
Customers pay in CAD
USD CAD
CAD has depreciated by nearly 27% over the past year
Recent rout in commodity prices has driven down the value of the $CAD
Most of Indigo’s suppliers are situated in the US.

10. Revenue Growth Assumptions
Valuation - DCF
Revenue Growth Assumptions
Revenue Growth mainly driven by online store sales growth
DCF Inputs
Implied Price
WACC
Cost of Debt
Cost of Equity
total debt
4.007
Beta
0.52
Interest expense for 2015
0.069 Rf
1.69% rd
3.72% Rm 8%
6.5% Re
4.97%
Multiple
Growth Rate
Weight
10x 2%
Bear
$14.71
$10.57
20%
Base
$15.45
$11.55
60%
Bull
$17.22
$20.27
WAP
$15.66
$13.10
30%
70%
Total
$4.70
$9.17
$13.86

11. Valuation – Comparable Companies
EV/EBITDA
P/S
P/B
Median
6.938
0.29
1.16
Indigo Books and Music
3.768
0.3
0.9
Barnes and Noble
10.108
0.28
1.42
Amazon
40.6
2.2
18.58
Books a Million
2.22
0.09
0.35
Implied Price
$13.38
$10.18
$13.97
Weight
30%
WAP
$11.26

12. Increased Competition
Risks and Mitigation
Decreased Demand
Increased Competition
Demand for physical books dropping
Diversifying product offering
Expanding into online domain
Disruptive stealing market share
Strengthening Omni-Channel experience to fight for market share
Currency Risk
Economic Environment
Many suppliers are US-based
BoC likely to cut rates as rates are set to hike in the US
Downward pressure on bottom line due to currency exchange
Management looking into currency hedging options going forward
Retail industry heavily dependent on macroeconomic environment
Lower consumer spending leads to decline in revenue
Risks and Mitigation

13. Recommendation Implied Share Price DCF $13.86 60% Comparable Companies
Valuation
Summary
Implied Share Price
DCF
$13.86
60%
Comparable Companies
$11.26
40%
Price Target
$12.82
Slowing industry with low growth and increasing competition
Unfavorable macro environment
Management currently executing transformational plan
Excellent balance sheet
Entry Price:
Target Price:
Recommendation:
$10.84
$12.82 (+18%)
HOLD
Recommendation

14. Appendices
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Terminal Value
Revenues
SuperStores
655.5
644.6
615.12
607.2
625.2
Small Stores
149.4
145.2
137.6
127.4
127.8
Brick and Mortar Sales
804.9
789.8
752.72
734.6
753
775.59
Brick and Mortar Sales Growth (%)
-2%
-5% 3% 2% 1% 0%
Online
90.6
91.3
91.9
102
114
128.82
online Store sales growth (%)
11%
12%
13%
14%
Other 46
39.1
34.1
31.1
28.4
25.844
% growth
-15%
-13%
-9%
Total Revenue
968.9
941.5
920.2
878.8
867.7
895.4
930.25
969.23
1,002.18
1,028.32
1,047.01
Growth Over Prior Year
3.0%
(1.3%)
(2.3%)
(5.9%)
3.2%
3.90%
4.19%
3.40%
2.61%
1.82%
EBITDA
54.8 25
28.5
0.1
20.5
21.115
EBITDA Margin (%) 6% 4%
NARROW MARGINS DUE TO CAD WEAKNESS
Less cash used in Investing
-43
76.29
-15.06
-25.62
-15.32
% of revenue 8%
-3%
^Anomoly- large amount of proceeds received from sale of Kobo subsiduary
Less Changes in non-Cash Working Capital
Change in N.C.W.C
26.088
-1.089
19.196
% of revenues
-4%
-0.12%
EBIT
-5.50
-9.30
-9.69
-10.02
-10.28
-10.47
-1%
Free Cash Flow
3.63
3.53
3.78
4.19
4.78
108.35
PV(Perpetuity Method)
79.08
PV(Exit Multiple Method)
244.64