Indigo Books & Music Inc.

Hugues Simard – Chief Financial Officer Heather Reisman – Chief Executive Officer

Bob Gibson – PI Financial David McFadgen – Cormark Securities

Good morning, everyone. My name is Hugues Simard, I’m the Chief Financial Officer of Indigo, and thank you for joining us to review our First Quarter Fiscal 2018 results.

Also on the line is our CEO, Heather Reisman; but Heather is traveling and the connection isn’t fairly good. So she is on the line.

But I will answer your questions if that’s okay. And then I’m sure Heather will add some color as the connection, if the connection gets a little better.

So regarding the materials for this conference call, we issued the press release after market closed yesterday evening. And it can be found at indigo.ca and on SEDAR.

The conference call will be recorded and archived in the Investor Relations section of the Indigo website. A playback of the call will also be available by telephone until 11:59 p.m.

Eastern time on August 16 of this year. This conference may well contain forward-looking statements.

And to the extent that it does, we refer you to our cautionary statement regarding forward-looking statements in the press release and the MD&A related to this quarter and year. So first, I’d like to talk about the financials.

And then we’ll will go to some of our strategic initiatives. So revenue as you – revenue increased – so revenue for the quarter increased 6.8% and comparable sales grew by an impressive 5% this quarter, which is on top as you know last year is already strong growth, which was close to 8%.

Our retail operations delivered solid results and our online performance again, surpassed our expectations. From a category standpoint, General Merchandise continued its double-digit growth fueled by lifestyle, paper and toys, which performed exceptionally well.

Well books remain healthy and showing growth over last year, despite there wasn’t any – this quarter any major launch this quarter but even despite that, we managed growth on books. In terms of our stores, as you know we successfully launched our Sherway Gardens new concept store in Toronto last year, and following the success of that store, we rolled out our new store concept in Oshawa and Ancaster this past quarter and both stores, I’m happy to report are showing tremendous results both on top line and on operational metrics.

This is excellent performance. It’s a really good start to the year.

And we are all energized, and we will keep up the momentum. We’ve got a well-thought-out plan for the rest of the year.

And we’ll will continue to deliver the best customer experience in the market. In terms of more detail, if I can now get into a little bit more detail in terms of our financial statements.

For the 13 weeks ended July 1, 2017, we recorded revenues of $206.3 million, which was $13.2 million more than last year, that is the 6.8% growth that I referred to earlier, and the 5% growth comparable on in comparable stores. In terms of channels, both channels reported very, very high growth.

In terms of retail, the growth was higher than what we had expected, and online, we’re maintaining double-digit growth there as well. Online was 20.5% growth, and the retail growth was in the 3.5% growth.

In terms of categories, we continued to record double-digit growth as I said earlier in General Merchandise, the strongest channel – the strongest products within the General Merchandise were lifestyle, toys and then paper. Core trade books as I said, remain healthy with growth over last year.

In terms of margin, margin increased by $8 million for the quarter, which represents a margin rate improvement of 1%, and that’s due mostly to higher sales volume in retail and online as I said earlier, and also higher gift cards breakage. In terms of costs, overall the operating selling and administration cost increased $3 million compared to last year.

And that was obviously driven by higher volumes. But also the important point here, I think is that these costs decreased as a percentage of sales showing our focus on maintaining controls costs within the company.

For the year, adjusted EBITDA improved by $6.2 million, which was driven by higher revenue in margin, and we achieved breakeven for the quarter. After interest income, taxes and depreciation, the net loss for the first quarter was $5.3 million compared to a net loss of $9 million last year.

Finally, looking at the balance sheet. It continues to be very strong.

We ended the year with close to $200 million – $196.7 million in cash and short-term investments, which is $20 million more than last year. And of course, I remind you that we still have no debt on the balance sheet.

At this point, I’d like to open the call for questions.

Good morning. Great numbers.

Good morning, Bob. Nice to take to you.

Your small-format stores beat the superstores on a same-store sale basis. I rarely see that.

Can you give me a little color on what happened?

They are actually very similar. On the comparable, the issue is that there were fewer stores open.

We were renovating a few more superstores. So on the comparable, when we – on the comparable basis, it shows slightly lower growth on the superstore versus the small format.

But if you really – till last year, it is roughly the same 3.5% growth in all stores.

Okay. Let’s follow up on that.

How many stores do you think you are going to be renovating this year?

We have very aggressive. I mean, we’re focusing on superstore.

We have a dozen other stores that are in-line for renovation. We have more for next year.

So there is going to be close to 20 store that are going to be renovated within the next 12 months.

Okay, great. And can I get a little more color on unplug meditation, and why you made the investment?

Unplug meditation is due to, I’m Sorry, I think, Heather wants to make a comment on unplug. Can you try again, Heather?

[Audio Dip] who have an interest in the whole meditation area, and so this is just a little exploration concept for us.

Okay, great. Thank you very much.

Is there anything else, Bob?

Hi, I couldn’t here Heather very well there so I’ll just – did she say that you want to bring in some of that product into the stores, in the meditation side?

Yes, exactly. I think she mentioned that.

I’ll let you go ahead, Heather. Perhaps, we can hear you better now.

[Audio Dip] completely preliminary basis. I don’t think – we are constantly exploring ideas and that’s why I would say about this.

We do think that meditation will be a big trend. We see it in purchase of books in this area and so we’re exploring the potential of deals in our large activity.

So that’s all we can say about it right now. It’s just one of our typical explorations.

Okay. Maybe if I can ask a question on gross margin.

So I see that the gross margin actually improved a little bit in the quarter year-over-year. On the other hand, your online sales were up 20%.

Several has been under the impression that the gross margin and online sales is a bit lower than the sales you generated in store. Maybe the growth in merchandising side, which has higher margin then books is offsetting.

A little margin online, can you give us a little color on what’s driving that improvement in gross margin and is on our online sales or do online sales have a lower gross margin? Just kind of wondering what’s happening there?

Yes, David. To your point, yes.

Online sales right now, do have a slightly lower margin. The shipping costs being a little bit higher.

This is something we’re working on. And that we’ll will fix over time.

And you’re absolutely right. In terms of margin, the general margin improved mostly for – due to the volume in general merchandising.

And some of the as I said, when I refer to lifestyle, which had a more than 20% growth since last year. The margins were very high on this.

And we also got better, I’ll say, on the books side in terms of discounting. We were more efficient that discounting this year.

And then improved margin on that somewhat little bit as well.

Okay. So it sounded that you opened 2 new stores.

I think they were in the quarter, based on the shareware concept. Can you give us…

Partially, David, it was partly in the quarter. Not full quarter for Ancaster and Oshawa.

They were only a few weeks in the quarter, they were in that, I think, I believe its 6 weeks.

Okay. So in the past, you’ve given us an indication on the increase in revenue from moving from that old format to the new format for Sherway, and I was just wondering for those two new stores have seen pretty good increase in the revenue now with the new store concept?

Yes, these two stores are tracking more than 20% above other comparable stores. It differs depending on the period, because there was the Harry Potter situation that they we’re facing, they we’re comping over the past few weeks.

So it depends which weeks you look at but generally speaking since the launch we are looking at more than 20% improvement.

Okay. All right.

Okay, I think that’s it from me. Thank you.

Okay. Thank you, everyone.

Unless, Heather do you have any other comments? Otherwise, I think we will bring this call to an end.

Thank you very much for joining.

Thank you very much Hugues.

Thank you. Bye-bye.