Problems at Indigo

It’s not fashionable in the publishing world to worry about Chapters/Indigo, controlled as it is by founder & CEO Heather Reisman (above) and her billionaire husband Jerry Schwartz. They’re rich, so they can look after themselves, right?

But things are dire at Chapters/Indigo. Its financials, merely bad last year, need a ventilator today. We have no choice but to worry about the company because even billionaires have limits.

Indigo lost $37 million for the fiscal year ending March 2019. In the last quarter of the 2019 calendar year (bookselling is a fourth-quarter business) its revenues were $383 million, $42 million less than the same period in 2018. Total sales were off 10.5%. Worse, online sales, the supposed answer for every retailer facing bricks-and-mortar declines, were down more — 13%.

Things have only gotten worse in the last couple of months. The stores have been closed and 5,000 employees furloughed.

The best view of Indigo’s predicament is served up by its share price. It was hovering around $20 two years ago. Last August, when it sunk to about $8 a share, stories appeared in the Globe worrying about the company’s future and the Motley Fool types put it on a death watch. By the start of 2020, IDG.TO was trading at $4.30. It’s now $2.12.

That’s a 90% drop in the share price in two years, competitive with a lot of Alberta’s oil and gas companies. The Reisman/Schwartzs own 58% of the publicly-traded company’s shares. Back-of-the-envelope says they’ve endured a paper loss of about $280 million.

So now what? The options seem to be that the Reisman/Schwartzs dump the company, or hang on and hope to turn it around, or take it private.

Jerry (below) didn’t get rich by selling low so I don’t see the Reisman/Schwartzs bailing in a crisis.

That leaves turning the ship around, or taking it private, which are in some ways the same option. Regardless of whether its a public or private company, you’ve got to fix the business.

A fix involves closing stores, cutting staff, tightening inventory, imposing harsher terms on suppliers, etc. Not fun, but necessary.

The question is, who is the turnaround for? As things stand, all shareholders, including the Reisman/Schwartzs, would benefit from a turnaround. But if the Reisman/Schwartzs were to take the company private, buying up the 42 per cent of the shares they don’t own, they would be the full beneficiaries of their work.

Rumours that the Reisman/Schwartzs might take the privatization route started back in 2018 when Jerry made a series of insider purchases of Indigo stock. He picked up over 100,000 shares at $18 to $20 per (yikes).

So Jerry, the guy who two years ago spent roughly $2 million for 100,000 shares, could now snap up all of the 12 million shares he and Heather don’t own for about $24 million. That’s peanuts for Jerry, worth more than $3 billion. And he’d be paying a bargain price for a company with $223 million in cash on the balance sheet, presuming he has some faith in the future of bricks-and-mortar retailing.

Minority shareholders, of course, might want more than two bucks a share from Jerry, so there would need to be a negotiation. Regardless, Indigo stock has never been cheaper, and may never be this cheap again. Those 2018 share purchases aside, Jerry’s a shrewd investor and as well-informed on Indigo’s business as anyone alive. And he thought the company was worth $20 a share two years ago. The book and housewares retail markets are not that different today (absent, of course, coronavirus). Surely he sees the opportunity.

I know that if I was going to put myself through all the pain and hard work of a long-term turnaround, I’d rather be the 100% owner and the full beneficiary of my efforts. Same grind, much more reward. More risk, too, but risk is Jerry’s bread-and-butter.

Whichever path is chosen, everyone who cares about publishing in Canada has a stake in the outcome. Book chains are never beloved but they serve a lot of people and move a lot of product. Our experience at Sutherland House, which is too small to matter to so large a retailer, has been that Indigo is great to work with.

A further point about Heather and Indigo. She was on TV late last year charging Amazon with anti-competitive practices. Regular readers of SHuSH know that we agree with her on that.

In particular, she accused Amazon of producing cheap knock-offs of popular products, which forces Indigo and a lot of other retailers to offer only items that are not sold on the site.

This wasn’t sour grapes from Heather. The Wall Street Journal revealed last week that Amazon was indeed studying the data of independent sellers on its platform and using that information to make competing products in violation of its stated policies. For example, Amazon employees gathered data on a hot-selling car-trunk organizer (including total sales, shipping costs, and profit estimates). They must have liked what they saw because before long Amazon had introduced its own car-trunk organizers (below).

The EU, the US Justice Department and the Federal Trade Commission are all investigating Amazon for anti-competitive practices, not that that will bring relief to Indigo and other retailers in the foreseeable future.

And a final point about Heather and Indigo. We wonder if she has figured out that her biggest problem isn’t Amazon but public libraries. We’ve written about this in the past, and we’ll write more about it in the not-too-distant future, but our math finds that for every book sold in Canada, 4.5 are borrowed from libraries at no cost to the reader.

Of course, the library (that’s Seattle’s above) does pay for one copy of a book that it subsequently loans out repeatedly. Taking that purchase into account, our math finds that we’re still left with about four books borrowed for every one bought.

You try keeping a bookstore afloat when publicly-funded institutions are making available at no charge to the reader the exact same product your bookstore sells, in four times the volume.

Would Starbucks be Starbucks if, for each of its locations, municipalities opened a rival public coffee outlet offering the exact same drinks to the exact same specifications, at no charge?

As I said, much more to come on this.

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