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.
