Time to Buy This Beaten-Down Canadian Retail Stock?

Indigo Books and Music Inc. (TSX:IDG), a Canadian retail stock that is trading at rock bottom valuations, may be worth considering at these levels.

| More on:
Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline

Image source: Getty Images

Looking at the last few months, we’ve witnessed many Canadian retail stocks come crashing down due in some part to weakening consumer spending trends. While very upsetting for shareholders of these stocks, these crashes often provide investors with the opportunity to build positions at much better valuations.

Let’s take Canada Goose Holdings Inc. (TSX:GOOS)(NYSE:GOOS) as an example. Canada Goose stock has plunged 40% from its 2018 highs, as the company failed to meet expectations.

Growth has remained strong and the retailer is having good success in its global expansion and in its product diversification, but Mr. Market took it down anyway, as expectations baked into the stock were simply too high.

The other retail stock that I would like to look into here is Indigo Books and Music Inc. (TSX:IDG). Indigo stock is also down big from its 2018 highs — to the tune of 69%, to be exact.

Although the story here is quite different, we are nonetheless faced with the question of whether it’s time to buy this beaten-down Canadian retail stock.

Indigo: a retailer with promise yet unrealized

Indigo’s growth rates are nothing like Canada Goose’s. But Indigo’s valuation was never like Canada Goose’s either. So in the end, in Indigo Books we have a retail stock that has faltered and a company that has also faltered.

Part of this was due the company’s big capital expenditures into the business, but part of this is also a merchandising strategy that appears to have stalled.

What the company needs to do is to revamp their merchandise, offer new and exciting products again, and probably to expand their merchandise selection and categories. This is no small feat, and as a result, this will take the attention off of the U.S. expansion, as it should.

Recall that Indigo’s business had a few great years recently, showing the potential of this company when they get things right. Book sales had stabilized, and its merchandise and online sales categories were growing at over 20%.

Indigo’s merchandise selection grew tired, however, and so did shoppers. Spending at Indigo stores therefore took a hit.

The latest quarter looks bad

Revenue declined 6.2% in the latest quarter, driven by reduced promotional activity as the company works on strengthening margins. To this end, gross margin increased to 43.5% from 42.8%, so the intended effect was achieved. This is good news for building a higher margin business.

Once Indigo’s strong point in its business, online sales declined 14.8% in the quarter. Again, this was due to a reduction in promotional activity, and with the online channel being more sensitive to price, it makes sense that it was affected even more.

Rock bottom valuation

Valuation is at rock bottom, at 0.2 times sales and 0.7 times book value. This stock is clearly not for everyone but we can’t argue that the stock is looking cheap.

Debt levels remain insignificant, cash levels are declining ($52 million versus $95 million last year), and the company’s investment in its stores and its entrance into the U.S. market has been expensive.

In short, one must believe in the story to get comfortable enough to buy even at these distressed valuations.

Foolish bottom line

Indigo stock is screaming “value” at these levels. The company has great retail locations, has a good shot at establishing itself as an online force to be reckoned with in books as well as general merchandise, and management has signalled a new product strategy roll out in the coming months that could help drive traffic and revenue.

Indigo’s long-term strategy is to become the new department store of the future. If you believe in all this, the stock is a steal at these levels.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas owns shares of INDIGO BOOKS & MUSIC INC.

More on Investing

Pixelated acronym REIT made from cubes, mosaic pattern
Dividend Stocks

Passive Income: 2 REITs to Play Lower Rates

Killam Apartment REIT (TSX:KMP.UN) specializes in the East Coast market, where borrowers aren't as stressed as they are in Ontario…

Read more »

Dice engraved with the words buy and sell
Bank Stocks

Is BNS a Buy, Sell, or Hold?

Bank of Nova Scotia (TSX:BNS) stock looks like an intriguing high-yield bank stock to pursue this month.

Read more »

Increasing yield
Dividend Stocks

3 Cheap Canadian Stocks That Offer Over 7% Dividend Yields

Considering their high-yielding dividends and attractive valuations, these three stocks can be excellent holdings right now.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Tuesday, April 16

Canada’s latest consumer inflation report and the ongoing geopolitical tensions in the West Asia region could keep TSX stocks volatile…

Read more »

data analyze research
Tech Stocks

1 Stock I’m Buying Hand Over Fist in April Despite the Market’s Pessimism

Are you looking for a stock to buy this month despite the pessimism in the market?

Read more »

value for money
Dividend Stocks

Canadian Tire Is Paying $7 per Share in Dividends. Time to Buy the Stock?

With Canadian Tire trading ultra-cheap and offering a safe dividend yield of more than 5.5%, is it one of the…

Read more »

Male IT Specialist Holds Laptop and Discusses Work with Female Server Technician. They're Standing in Data Center, Rack Server Cabinet with Cloud Server Icon and Visualization
Tech Stocks

Constellation Software Stock: Buy, Sell, or Hold?

Constellation Software stock has rallied 186% in the last five years and is now valued at an expensive 100 times…

Read more »

Payday ringed on a calendar
Dividend Stocks

Secure Your Future: Top 2 Monthly Dividend Stocks to Buy in 2024

Here are two top Canadian monthly dividend stocks you can buy today to minimize risks to your portfolio.

Read more »