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Why Indigo Books & Music Inc. Soared Over 8% Yesterday

Indigo Books & Music Inc. (TSX:IDG), Canada’s largest book, gift, and specialty toy retailer, watched its stock soar over 8% as of 11:35 A.M. EST in Wednesday’s trading session in response to its fiscal 2018 third-quarter earnings release after the market closed on Tuesday. Let’s break down the results and the fundamentals of its stock to determine if this could be the start of a sustained rally higher, and if we should be long-term buyers today.

The results that ignited the rally

Here’s a quick breakdown of seven of the most notable statistics from Indigo’s three-month period ended December 30, 2017, compared with the same period in 2016:

Metric Q3 2018 Q3 2017 Change
Total revenue $433.27 million $400.30 million 8.2%
Total comparable sales $418.90 million $388.20 million 7.9%
Gross profit $189.04 million $177.12 million 6.7%
Operating profit $55.59 million $50.89 million 9.2%
Net earnings $42.55 million $39.95 million 6.5%
Net earnings per common share (EPS) $1.58 $1.51 4.6%
Cash flows from operating activities $153.46 million $139.25 million 10.2%

Is the rally warranted?

It was an outstanding quarter overall for Indigo, driven by a “strong holiday season” and highlighted by its “highest ever quarterly revenues and a 17th straight quarter of top-line comparable growth,” so I think the +8% pop in its stock was warranted. I also think the stock could continue higher from here, because it still trades at very attractive valuations, including just 19.4 times fiscal 2018’s estimated EPS of $0.98 and only 16.7 times fiscal 2019’s estimated EPS of $1.14, both of which are inexpensive given its long-term growth potential.

Indigo Books & Music has not only been surviving the incredible growth of Amazon.com, Inc., it has been thriving, and I do not see any reason that will prevent it from continuing to do so going forward. Indigo has quickly become one of my favourite retail stocks, so take a closer look and consider initiating a position today with the intention of adding to that position on any weakness in the near future.

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Fool contributor Joseph Solitro has no position in any stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Amazon. The Motley Fool owns shares of Amazon.

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