So, I have finally decided to short Indigo Books & Music Inc. (TSX:IDG) stock.
All values are in CAD unless noted otherwise.
My reasons:
- 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 Q3’2023By 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.
So, I called RBC DI and asked them about short selling.
They told me that usually, if the stock price is below $3, they don’t have it in their inventory, and I will not be able to short it.
Oh wow!
Happy I was not able to short Greenidge. 😀
Source: Indigo Q4’2023 Call Transcript
My estimates were $15-$25m loss because of cyber attack.
The loss per share, on the other hand, came out at only $1.78, better than my estimates.
Odd, but probably because IDG has finally started to reduce inventory.
I actually think the new CEO has a chance to save Indigo, he has already gotten rid of useless directors. It’s a good start.
Lower freight prices, reduced inventory, and operational expense cuts might help Indigo survive.
Plus, if you add the emotional and monetary attachment of Heather Reisman. She sure doesn’t want Indigo to go down, otherwise, why would Trilogy pour so much money into this?
I mean, Trilogy basically owns the company already, and now with this new $45m loan… they could just take it private.
But if last year is any indication, the next two quarters will most likely see more losses, even with all the improvements.
By the end of 2023, Indigo might be in a dire situation.
Adding another possible rate hike by the Bank of Canada can result in a very grim Christmas season for IDG.
So it is a new CEO vs. a bad Macro Environment. Who is going to win?
About monetary attachment, I don’t know about Trilogy Investments L.P., but Trilogy Retail Holdings Inc. was buying shares at up to $19/share.
These guys are seriously under water.
I think this is misleading, because I’ve purchased my book from Indigo on January 24 and while I got the book, I have never been charged for it (thanks, btw). Attack has probably happened couple weeks before February 8!
In the end I was hoping for the stock to fall lower, but it is what it is.
Even though Indigo‘s stock price felt considerably, I’m still short, albeit only virtually.
Whatever the reason, it is a bad news for Indigo.
The guy only spent one year at this job.
Source: Leadership change at Indigo
Source: Indigo Announces Key Appointments
Not going to help, imho, I’m still virtually short. 😀
Bad timing on my end, as usual, but I would cover now.
There is a chance that Heather will take it private, even though IDG is a money-losing (and technically insolvent) business, at least while interest rates are this high.
Or Indigo is just turning into a meme stock.
FOLLOW-UP: Indigo, what’s in the books?