Whither Chapters 3 or Chapters Fiscal 2014 Results - Smooth Flow into Tragedy

Indigo Books and Music Inc is the major corporation behind Canada’s big book chains - Chapters, Coles, Indigo and the World’s Biggest Bookstore (now defunct).   I have written a number of blogs about the fate of Chapters (or at least about their recent financial results and what that may portend for their future).  In this blog, I will update some of this financial data, in particular the results for fiscal year 2014 (in Canada the fiscal year usually runs from April 1 to March 31, so this time period is April 1, 2013 to March 31, 2014).

I called this blog “Smooth Flow into Tragedy”, as it was the title of an English essay a friend of mine wrote back in undergrad days, concerning a well-known Shakespearian tragedy.  I always liked the title, and since it has literary overtones, it seems appropriate to use it to summarize the recent fate of Chapters and bookstore chains in general.

The first graph below shows the sales trajectory for Chapters from 2009 onwards (this data is widely available from online stock market information sources such as the Globe and Mail or from the Chapters/Indigo website). 

http://www.chapters.indigo.ca/investor-relations/financial-news-releases/

I show sales in both current dollars ($millions), and in inflation-adjusted dollars (in this case using 1999 as the base year, since this is an update of some earlier graphs that went back further in time).  As we can see, the earlier trend of declining sales revenue continues during fiscal 2013-14.   This is especially clear in the CPI adjusted line (the lower line).

I should also note that there appears to be some restatement of financial results for 2012-13, which made that year appear somewhat worse than it had in Chapters’ earlier financial data.  I am using their most recent Annual Report (published just a week or so ago, in late May 2014) for that year’s data, as well as appending the fiscal 2014 results.   Specifically, the earlier data reported revenues of $892 million for fiscal April 1, 2012 to March 31, 2013, while the latest report shows $878 million.  I can’t explain the change, other than to nod towards the mystery of GAAP (generally accepted accounting principles).  No doubt someone more conversant with these principles could tell what happened to that $14 million from the detailed footnotes in the report.  Sadly, I am not up to that task.

As noted in the earlier blog, the downturn from 2011 onwards is likely due to the disruption of the book market by the widespread adoption of ebooks, which would have cut sharply into print-book sales.  A significant increase in self-publishing and Indie publishing went along with that, and Chapters has probably not seen much of that revenue, though they might have benefitted from some Indie sales through Kobo, as they do  continue to have close business ties with Kobo.  For those who don’t know, Kobo originated with Chapters, who then sold them to Japanese retailer Rakuten in 2011.  At any rate, the graph appears to be a fairly gentle decline, nothing to get too alarmed over.

We next look at operating expenses versus sales, and consequent operating income (operating profit or loss), in the graph below.  I have just included the inflation-adjusted graph lines, so as to simplify the picture.  As you can see, Chapters operating income dropped during the 2010 to 2012 period, eventually dipping below 0 in 2012, for an operating loss.  In 2013 they ground out a (very) small profit, as their cost-cutting measures managed to overtake their revenue declines, then after that short breather, they continued their decline in 2014.

The above graph certainly looks harmless enough - that’s why I called it smooth flow into tragedy.    It appears that they couldn’t cut costs as quickly as revenue fell in 2014, not a good sign, even though they seem to be undergoing a gentle descent in revenues.  But, under normal circumstances, their loss doesn’t seem impossible to recover from.

The third graph (below) shows operating income (profit or loss) at a more useful scale.   This graph paints a much more alarming picture than the first two.   We no longer have a smooth flow into tragedy but rather what appears to be a plummet into disaster.  It is pretty clear that things took a nosedive after 2010, with a bounce back up in 2013.  That appears now to be the infamous dead cat bounce, given the continuing and increased losses in 2014 .  (That’s a financial term that implies that one shouldn’t get too excited about a turnaround, because even a dead cat will bounce a bit after a big fall, but it doesn’t mean it’s getting back on its feet).

The next graph is similar to the one above, but it shows operating income as a percentage of sales, by year.  One can think of this as return on investment.  It’s now underwater, and has been for the past three years.  The trend does not look good.  Investments that have a negative return in a non-recessionary environment, and that have real problems with their business model being disrupted by new technology and modes of production/distribution don’t exactly have a rosy future.

 

In an earlier blog I said:

“Perhaps Chapters will be able to turn things around, though given the technological disruption that they are facing, it might not be a smart bet, if you are thinking of investing for the long term.  Companies can cut costs faster than they lose sales at the beginning by closing marginal stores, laying off inessential staff, selling unnecessary equipment (not sure if they have a corporate jet), and similar measures.  But most of those things can only be done once, so if sales don’t turn around, it just delays the inevitable.  As they say, you can’t shrink your way to greatness.”

It looks to me that their cost cutting measures won’t be sufficient for the task at hand, or at least not until they have retrenched to only a few stores in the largest urban centers, that might still have the concentration of readers who are sufficiently attached to paper books to support those stores.

In some earlier blogs I also did some content analysis, focussing on their transformation from a bookstore to a knick-knacks and books store.  Here’s a quick update on that, based on some post-Christmas advertising in the Globe and Mail, and on email blasts:

Chapters/Indigo, Flyers Delivered with Globe and Mail
Date	Flyer Title	Non-book	book	total	Pct. Book
15-Sep-13	Indigo, Joy of the Table	3	1	4	25%
01-Oct-13	Indigo, Best of Fall Books	1	3	4	81%
21-Nov-13	Indigo/Tech Christmas Flyer	10	2	12	13%
01-Dec-13	Indigo/Chapters Christmas Flyer	28	22	50	44%
05-Dec-13	Our Very Best Gifts	48	55	103	53%
14-Dec-13	Indigo/Kids Christmas Flyer	29	15	44	34%
31-May-14	Father’s Day, 2014	57	51	108	47%
	Total	176	149	325	46%

 

Chapters/Indigo, Buy of the Week Emails
Date	nonbook	book	total	Pct Book
03-Feb-14	6	8	14	57%
04-Feb-14	9	1	10	10%
10-Feb-14	6	9	15	60%
17-Feb-14	7	10	17	59%
03-Mar-14	9	10	19	53%
17-Mar-14	8	11	19	58%
Total	45	49	94	52%

So, Chapters is definitely continuing to emphasize non-book items, especially in their glossy flyers, sent out with the newspapers.  It is also worth noting that a significant number of the books being advertised are cookbooks (the Father’s Day flyer really pushed the meme of dad the barbeque chef), picture books, children’s books and the like – useful stuff, but not the sort of thing that makes you think “guardians of literary culture”.  So, even if their transition is successful at keeping Chapters as a going concern, it will only be half the paper bookstore that it once was – perhaps even less, once The Metamorphosis (to use a literary term) is complete.

I note in passing that their major good news announcement in their annual report was “Indigo launched the first two American Girl Specialty Boutiques outside the United States”.   Somehow I don’t think going into the business of selling dolls will save this bookstore chain, though it seems oddly appropriate that they are pinning their hopes on a children’s  fantasy world.