So, I have finally decided to short Indigo Books & Music Inc. (TSX:IDG) stock.
All values are in CAD unless noted otherwise.
- Indigo‘s book value. It’s less than $1 per share, while the stock is still trading around $2. If you remove Intangibles, then it’s negative.
At the same time, I would actually cut in half the Unredeemed gift card liability because lots of people just lose their gift cards or forget about them.
Anyway, there is basically zero equity in the company.
Source: Indigo Q3’2023
- Growing inventories and accounts payable, so whether they have to give big discounts to move all this overpriced stuff they are selling or keep growing inventory that no one is buying.
- Lower revenue, compressing margins, and lower earnings.
Source: Indigo Q3’2023
By comparing the first 3 quarters of FY2022 with FY2023, one can notice that Indigo has bigger losses for slow Q1 and Q2 and smaller earnings for “Holidays” Q3.
I assume that Q4’2023 will be worse than Q4’2022, so let’s say a loss of $1 per share. Adding extra losses because of the cyber security attack on Indigo in February, I’m projecting that FY2023 losses will be more than $2/share.
- While going through various company documents, I found a very interesting chart:
In 5 years, IDG shares lost 75% of their value, while management’s compensation grew from $5M to $7M. Maybe if the share price falls another 75%, management can finally double their compensation. 🙂
- Talking about motivation here. Except for Heather Reisman and her husband, Gerald Schwartz, no one else is holding any meaningful amount of shares. The majority holds no shares at all.
- Yet another rate increase by the Bank of Canada will not improve sales.
On the other side:
- Indigo still has plenty of cash, so we are not talking about bankruptcy here. Not yet.
- Gerald Schwartz and Heather Reisman hold almost 60% of all the shares. So, IDG is basically a private company. Trading volume is very low, resulting in big swings in the share price.
- Lots of Canadians still love and shop at Indigo. Even I usually buy books from there, just to stick it to Amazon since Indigo usually matches the price. And that probably makes their print business unprofitable.
- Indigo announces retirement of Heather Reisman and director changes. I guess there was a big “fight” over FY2023 results or/and the future the company at the board meeting and… I’m not sure whether it’s good news or bad. On one hand, it looks like directors are just running away from a “sinking ship”. On the other hand, the new CEO might be trying to save Indigo by cutting expenses, including useless directors. So, I think this is positive news but negative to my short thesis. 😀
In the end, my short trade has never happened because of this:
I got upset and tried to short TSX:FOOD instead, same thing, then NASDAQ:GREE, no luck, then TSX:NFI, didn’t work for a different reason.
RBC DI, meh… 🙂
Let’s pretend that I was able to short IDG at $2.11/share and see how it goes from here.