Indigo (TSX: IDG) is a Canada-based book, gift and toy retailer. The company operates retail bookstores across Canada which includes 89 full size stores under the Indigo and Chapters banner and 100 small format stores under Coles, Indigospirit, SmithBooks and The Book company banners.
The company reports a market capitalization of $118 million with a 52-week high of $11.73 and a 52-week low of $3.90
Intrinsic price
Based on my calculations using a discounted cash flow valuation model, I determined that Indigo has an intrinsic value of $7.39 per share.
Assuming less-than-average industry growth, the intrinsic value would be $7.04 per share, and higher-than-average industry growth would result in an intrinsic value of $7.79 per share.
At the current share price of $4.32, I believe Indigo is significantly undervalued. Investors looking to add a retail company to their TFSA or RRSP should consider buying shares of Indigo.
I would recommend following the stock and waiting until the end of 2020 as a correction in the market could allow investors to buy the stock at a cheaper price.
Indigo has an enterprise value of $202 million, which represents the theoretical price a buyer would pay for all of Indigo’s outstanding shares plus its debt. One of the good things about Indigo is its low leverage with debt at 0% of total capital versus equity at 100% of total capital.
Financial highlights
For the nine months ended September 28, 2019, the company reported a mediocre balance sheet with $17 million in negative retained earnings.
Generally speaking, negative retained earnings are a bad sign as it indicates the company has more years of cumulative net loss than net income.
This is not a large concern, however, as the company adopted IFRS16 recently, which led to the adjustment in retained earnings from $131 million to $22 million as at March 31, 2019. This has exacerbated the effects of a negative retained earnings.
The company reports $528 million in long-term lease liabilities and $43 million in short-term lease liabilities due to the adoption of IFRS16. With cash and equivalents of $47 million, I’m not concerned about Indigo’s ability to meet its short-term debt obligations.
Overall revenues are down from $422 million to $396 million as Indigo continues to adapt to a changing retail environment. Overall, net loss for this period is $40 million, down from $35 million in 2018.
The cash flow statement is quite ordinary with cash outflows of $33 million under financing activities related to principal and interest payments on lease liabilities.
Further, the company is reducing its capital expenditure spending with a reduction in purchases of PP&E from $38 million to $4 million.
This is a good decision on the part of management given the difficulties currently experienced by the bricks and mortar retail industry.
Foolish takeaway
Investors looking to buy shares of a financially stable retail company should consider buying shares of Indigo. The year 2020 will inevitably be a rough year for the markets, and I recommend investors wait for the ideal time to buy in.
Despite the company’s negative retained earnings, the company still boasts an intrinsic value of $7.39 — a premium compared to the $4.32 at which the stock is trading at writing.
Further, management is committed to keeping non-essential spending to a minimum and has strategically reduced capital expenditure spending to reflect a changing retail environment.
