Friday, 3 October 2014

Whither Chapters 3 (and whither Barnes and Noble)

Indigo Books and Music Inc is the major corporation behind Canada’s big book chains - Chapters, Coles, Indigo and the World’s Biggest Bookstore (the latter now shuttered).   I have written a couple of blogs about the fate of Chapters (or at least their recent financial results).  In this blog, I will update this data, using Quarter 1 results for 2014-15 (April to June, 2014).

Quarter 1 results Chapters Indigo, 2015 fiscal year.
The data below is taken from a transcript of a conference call make on August 5, 2014, between Chapters executives and some key investors, as well as the First Quarter Report, for the 13-Week Period Ended June 28, 2014.  Both of these documents are available on-line.

They were painting a pretty rosy picture in the investor conference call transcript (claiming “forward traction”, but it doesn’t really look that way to me.  Here’s the trend, which looks more like wheel spinning than forward traction, to this observer (note that these are not inflation adjusted):

2009: -1.2 million loss

2010: -2.3 million loss

2011: -5.3 million loss

2012: -18.1 million loss

2013: -5.5 million loss

2014: -15.0 million loss

2015: - 14.0 million loss

I should note that for 2015, the loss before income taxes, depreciation and amortization (EBITDA) was 7.1 million, but net loss as shown above was 14.0 million.  Opinions vary concerning the relative merits of reporting EBITDA versus net profits or losses.  Some people think that EBITDA is a good measure of profitability, others consider it a bit of a gimmick.  I will go with the 14 million dollars figure, as that is consistent with the rest of the times series values I use in the blog.

That’s 7 straight first quarters without a profit.  Granted, the business tends to be dominated by the other three quarters, especially the Christmas sales quarter, so a first quarter loss may not be particularly indicative of trouble over the course of the year.  In fact, the data below (also from documents on their website) shows clearly that a Q1 loss need not mean a loss for the year.


Annual $M

Q1 $M





















However, if we drill down a little deeper and do a simple X-Y chart showing the correlation between Q1 losses and Annual Profit/Loss, a different picture emerges, as shown by the graph below.

Here we can see that Q1 and annual results have historically been quite closely linked, with a simple bivariate regression showing an R-squared of .82.  Essentially, that means that 82 percent of the variance in annual earnings can be explained by the variance in Q1 earnings.  In fact, we can use this relationship to predict the annual loss for fiscal 2015, based on the first quarter.  That’s shown by the red star, as an approximate loss of 29.6 million dollars.

I should note that I excluded 2012 from the regression - that was the year that Chapters sold the Kobo ebook store, so it had a large cash infusion.  You can’t pull off something like that every year, so I excluded it from the calculation.  If I put that data point back into the series, the projected loss goes down to about 8.8 million dollars.
Another point worth noting was that the 2015 fiscal year (April 1, 2014 to March 31, 2015) included Easter, which wasn’t the case in Quarter 1 last year.  So, the marginal year over year improvement between Q1 2013 and Q1 2014 might just be a fluke of the calendar, as the Easter holiday season will generate some additional sales.
Looking at the composition of sales, the big revenue gainers were in the non-book areas.  Revenues from books were up about $0.5 million, which is a gain of less than half a percent. If we factor in inflation, that’s actually represents a reduction in real dollars.

General Merchandise (toys and stuff) were up, though.  An example of this that  they emphasize is the “American Girls” line of dolls that they are now marketing.  The General Merchandise category now accounts for 27.4% of the business, compared to 21.9% last year.

Correspondingly, Books are now 68.1% of sales, compared to 72.6% last year.  Note that “Books” also includes magazines, newspapers calendars and shipping revenue.  The inclusion of  shipping revenue with the “Print” category seems like a peculiar decision – perhaps it is money earned for shipping physical books.

The latest Chapters catalogue came out with the Globe and Mail, in September.  It is entitled “The Joy of Fall, 2014 Guide”.  An informal content analysis that I did showed that:

·         90 of 176 identifiable items were books, for 51% of the total.

·         14 of 32 pages were primarily dominated by books, for 44% of the total.

So, depending on how you operationalize this variable, just over or just under half the content being pushed were books, with the remainder being non-books.  The non-book items consisted primarily of household items for the kitchen, a lot of soft snugly stuff like pillows, throw rugs, scarves, and a selection of electronic items, including some ebook related items.
An interesting development that I have noticed at Chapters recently, is that “front table” books seem to lack prices on the covers these days.  And the tables themselves often don't have prices posted, so one sees signs saying “40% Off”, and is left wondering “40% off of what?”.  I suspect this is a small but significant indicator that the notion of the value of a printed book is so nebulous right now, that publishers and retailers prefer it to remain free floating, at least for the books that they are pushing hard.  I don't know if this trend extends to the bulk of the shelved books, deeper into the store.  At any rate, it leaves the consumer unsure of just what his or her purchase will come to at the cash register.  Contrast that with Amazon (or Kobo), where prices are prominently displayed.

So, Chapters is well on its way to being a general merchandise store that features a substantial book presence, rather than a bookstore per se.  For writers and publishers, this means that Chapters is effectively shrinking in importance, even if their changing business strategy helps them to remain profitable.  No doubt this is especially the case for mid-listers, who will be the first to be displaced by the transformation to general merchandise.
Quarter 1 results Barnes & Noble, 2015 fiscal year.
Barnes and Noble has also recently reported its Q1 results.  As is the case with Chapters, they painted the results optimistically, but it still rung in at a loss of $28 million. Their results are somewhat more difficult to interpret, due to the impact of the closure of Borders in 2011, and the various financial implications of the rise and fall of the Nook reader of the past 5 years or so. 
Annual $M
Q1 $M
As the chart shows, there is quite a bit of scatter in the data, so the predicted value for Fiscal 2015 based on Q1 results (a loss of $21.6 million) is rather more tentative than was the result for Chapters. 

So, given the volatility in the recent data, we will have to wait and see how Barnes and Noble do over the course of the year.  They might come in with a relatively small loss or even a small profit, depending to a large extent on how the decoupling of the Nook and physical retail operations goes.  Being further from the American scene, I won't say anything more definitive than that.

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