A N N UA L R E P O RT
F O R T H E 5 2 -W E E K P E R I O D E N D E D M A RC H 2 9, 2 014
“We are what we
repeatedly do.
Excellence, then,
is not an act,
but a habit.”
– Aristotle
The Indigo Mission
To provide our customers with the most inspiring
retail and digital environments in the world for books
and life-enriching products and experiences.
Indigo operates under the following banners:
Indigo Books & Music, Chapters, Coles, SmithBooks, Indigospirit,
The Book Company, and indigo.ca.
The Company employs approximately 6,200 people across the country.
!ndigo Enrich Your Life, Chapters, !ndigo, Coles and indigo.ca are trade marks of Indigo Books & Music Inc.
Table of Contents
2.
Report of the CEO
4.
Management’s Responsibility for Financial Reporting
5.
Management’s Discussion and Analysis
25.
Independent Auditors’ Report
26.
Consolidated Financial Statements and Notes
56.
Corporate Governance Policies
57.
Executive Management and Board of Directors
58.
Five Year Summary of Financial Information
59.
Investor Information
60.
Indigo’s Commitment to Communities Across Canada
Report of the CEO
Dear Shareholder,
In this note last year, I confirmed that we were in the early stages of a journey that is taking us from our position
as Canada’s leading bookseller to our vision of becoming the world’s first cultural department store. 2013/14
was the year in which we made a very meaningful financial commitment to accelerate our transformation, positioning ourselves for real growth in the years ahead.
Over the course of this year we launched 37 Indigotech™ shops and meaningfully enhanced the lifestyle
merchandising in almost all of our large format stores. At the same time, we made effective advances in the
merchandising of our book experience reinforcing our commitment to booklovers, writers and publishers who
are, without doubt, at the very core of our business.
This was also the year in which we focused investment on the digital side of our business, expanding our digital
marketing and merchandising capabilities and launching a five-star rated mobile app.
Finally, just after the end of the year, we launched our first two American Girl® shops within IndigoKids, reinforcing
our commitment to being the leading specialty kids’ book and toy retailer in the country.
Contrary to last year, when we had the benefit of the biggest blockbuster in book history as well as some very
strong performing titles, this year was one in which we had no single breakout book.We also experienced some
important learning curves in our lifestyle business which impacted margin in the second half of the year.
The combination of the very significant operating investments, the pressure on margin, and some non-cash
accounting requirements impacting us, result in a challenged bottom line.
I want to highlight that we are focused and committed to returning to full growth and profitability; that said,
I am fully convinced that both the decisions we made and the learning in the Company are key ingredients to
achieve these objectives.
In a time of industry transformation, investing to reposition is the key to success. It is also satisfying to know
that as we invest in our future, we have the strength on our balance sheet to comfortably support our efforts.
Even with these significant operating investments Indigo remains in a very healthy financial position.
As the year came to a close and even more so now that we are into our new year – there are several key indicators
that our strategy is gaining real traction. For the first time since the advent of eReading we are seeing growth
in our core book business – and not driven by a big hit but rather by efforts from our book team to create a great
experience for readers both in our stores and online. We are also seeing growth in every one of our lifestyle
categories (gift, paper and toys) both in sales and in margin. It is truly energizing to see our customers responding so well to what we are doing.
2
Report of the CEO
That said, going through a transformation is no easy task. It requires a clear vision, tenacity, incredible dedication
from everyone on the team, and the willingness to take risks, make mistakes, course correct and push forward.
We are totally up to the challenge.
We have a clear path forward and firm conviction that we are on the right track – one which will see Indigo
grow customer affection and deliver meaningfully to both our shareholders and our employees.
As always, we have, over the course of the year, continued to support the tremendous work of the Indigo Love
of Reading Foundation. This year brings to over $15.5 million the amount we have invested in high needs
schools across Canada. This is a very special initiative for us – and for those we touch. It is work in which we
take great pride and to which we remain fully committed. I want to thank our customers who directly, and
through their support of us, allow us to change forever the lives of the children we touch.
In closing, I want to take this opportunity to thank everyone on our team for the creativity and tremendous
effort which you bring to work every day. I also want to thank our Directors and Shareholders for their
continued support.
I look forward to reporting on our progress quarter-over-quarter and in this Letter next year.
Heather Reisman
Chair and Chief Executive Officer
Annual Report 2014
3
Management’s Responsibility for
Financial Reporting
Management of Indigo Books & Music Inc. (“Indigo”) is responsible for the preparation and integrity of the consolidated financial
statements as well as the information contained in this report.The following consolidated financial statements of Indigo have been
prepared in accordance with International Financial Reporting Standards, which involve management’s best judgments and
estimates based on available information.
Indigo’s accounting procedures and related systems of internal control are designed to provide reasonable assurance that its
assets are safeguarded and its financial records are reliable. In recognizing that the Company is responsible for both the integrity
and objectivity of the consolidated financial statements, management is satisfied that the consolidated financial statements
have been prepared according to and within reasonable limits of materiality and that the financial information throughout this
report is consistent with these consolidated financial statements.
Ernst & Young LLP, Chartered Accountants, Licensed Public Accountants, serve as Indigo’s auditors. Ernst & Young’s report
on the accompanying consolidated financial statements follows. Their report outlines the extent of their examination as well
as an opinion on the consolidated financial statements. The Board of Directors of Indigo, along with the management team,
have reviewed and approved the consolidated financial statements and information contained within this report.
Heather Reisman
Chair and Chief Executive Officer
4
Management ’s Responsibility for Financial Reporting
Kay Brekken
Chief Financial Officer
Management’s Discussion and Analysis
The following Management’s Discussion and Analysis (“MD&A”) is prepared as at May 27, 2014 and is based primarily on the
consolidated financial statements of Indigo Books & Music Inc. (the “Company” or “Indigo”) for the 52-week periods ended
March 29, 2014 and March 30, 2013. The Company’s consolidated financial statements and accompanying notes are reported
in Canadian dollars and have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued
by the International Accounting Standards Board (“IASB”) using the accounting policies described therein.
This MD&A should be read in conjunction with the consolidated financial statements and accompanying notes contained
in the attached Annual Report. The Annual Report and additional information about the Company, including the Annual
Information Form, can be found on SEDAR at www.sedar.com.
Overview
Indigo is Canada’s largest book, gift and specialty toy retailer, operating stores in all ten provinces and one territory in Canada
and offering online sales through its indigo.ca website. As at March 29, 2014, the Company operated 95 superstores under the
banners Chapters, Indigo and the World’s Biggest Bookstore and 131 small format stores, under the banners Coles, Indigo, Indigospirit,
SmithBooks, and The Book Company. Subsequent to year end, the Company closed the World’s Biggest Bookstore. During fiscal 2014,
the Company closed two superstores and three small format stores. There were no new stores opened in fiscal 2014.
The Company also has a 50% interest in Calendar Club of Canada Limited Partnership (“Calendar Club”), which operates
seasonal kiosks and year-round stores in shopping malls across Canada.
Indigo operates a separate registered charity under the name Indigo Love of Reading Foundation (the “Foundation”). The
Foundation provides new books and learning material to high-needs elementary schools across the country through donations
from Indigo, its customers, suppliers, and employees.
The weighted average number of common shares outstanding for fiscal 2014 was 25,601,260 as compared to 25,529,035
last year. As at May 27, 2014, the number of outstanding common shares was 25,299,089 with a book value of $203.8 million. The number of common shares reserved for issuance under the employee stock option plan is 2,029,824 as at May 27,
2014. As at March 29, 2014, there were 1,676,150 stock options outstanding of which 245,900 were exercisable.
General Development of the Business
It has been 17 years since Indigo launched its first superstore with a commitment to enriching Canadians’ lives through books
and complementary products. Much has changed since then in both the book industry and the larger retail landscape that
serves Indigo’s customers. The online channel has expanded dramatically, offering consumers an increased number of titles at
a lower cost than a traditional physical bookstore along with a broad range of general merchandise. In addition, the digital and
mobile channels have provided consumers with a completely new reading platform with instant accessibility, huge selection,
and lower costs.
Indigo continues to be proactive in an industry that is undergoing dramatic change and is well underway to establishing
itself as the world’s first cultural department store, a digital and physical place inspired by and filled with books, ideas, beautifully designed products, and the creative people who make it all happen. As such, the Company remains committed to its
transformational agenda and continues to invest in Indigo’s brand and the customer experience which will position the Company
for sustained growth. More specifically, the Company’s priorities remain focused on advancing the core retail business through
adapting its physical stores, improving productivity, driving employee engagement, and expanding the Company’s online and
digital presence.
Annual Report 2014
5
Indigo’s entry into the digital book market began with the launch of Shortcovers in February 2009 as a new digital destination offering online and mobile service with instant access to books, articles and blogs. In December 2009, Indigo transferred
the net assets of Shortcovers to a new company, Kobo Inc. (“Kobo”). During fiscal 2011 and 2012, Kobo expanded to become
a global digital book leader and subsequently, in January 2012, the Company sold all the outstanding shares of Kobo to
Rakuten, Inc. Notwithstanding the sale, Indigo continues to maintain a strong relationship with Kobo, supporting the products,
including eInk devices and tablets, and eReading services customers have come to love, and directly benefitting from the growth
of the Canadian eReading market.
Indigo has a loyal customer base. In fiscal 2012, the Company made changes to the irewards program, its fee-based loyalty
program, and launched the plum rewards program (“Plum”), a free points-based loyalty program. Previously, under the irewards
program, discounts were only offered on books; however, with the program changes to both irewards and Plum, discounts
and points are now offered on virtually all products in the stores. Combined, the irewards and Plum programs have a total of
6.7 million members.The success of these programs creates a rich understanding of the Company’s customers as well as direct
marketing and communication opportunities with Indigo’s best customers.
The Company’s key strategies over the last three years and going forward are outlined below.
Adapting Our Physical Stores
To ensure that the offerings in Indigo’s physical stores are rich and compelling, the Company continues to adjust and expand
its product mix, underlining Indigo’s commitment to becoming the premier year-round gifting destination in Canada. The
Company’s main growth categories are lifestyle, paper and toy sales. This has been achieved through a reduction in the floor
space allotted to books, given the erosion of physical book sales, as well as Indigo’s ability to carry fewer on-hand quantities
of books as a result of a more timely and efficient replenishment process.
Indigo continues to adapt and improve its physical stores to support these growth categories. Retail stores and their display fixtures are continuously being renovated and refreshed as part of the Company’s transformation. During fiscal 2014,
Indigo launched 37 Indigotech™ shops inside select superstores to showcase an expanded offering of electronic products. Last
year, the Company expanded its lifestyle and paper offerings, and Indigo continues to expand its assortment of toys and games
with either dedicated toy sections or expanded toy offerings in all of its superstores. Subsequent to year end, the Company
has begun launching American Girl® specialty boutiques inside select superstores. These locations mark the first international
retail presence for the iconic brand and reinforce the Company’s commitment to the importance of creative play for children.
The Company also remains committed to expanding its proprietary product development capability, which primarily
includes home, paper merchandise, and fashion accessories. This initiative is part of the Company’s focus on providing customers with increasingly meaningful and life-enriching merchandise while improving operating margins. To support this initiative, Indigo opened a new design office in New York in fiscal 2011 and a full line of proprietary merchandise developed by
this team began appearing in stores in fiscal 2012.
Driving Productivity Improvement
While a key focus of the Company’s business is evolving to meet the emerging needs of customers, the Company is also
focused on driving productivity improvements. The challenge for the Company is to continually look for innovative ways to
drive costs down while improving what Indigo delivers to customers. In particular, over the last three years the Company has
focused on implementing an integrated planning system to improve merchandise management and implementing supply chain
productivity initiatives designed to further reduce costs, deliver improved operating margins, and improve service to customers.
In fiscal 2014, the Company implemented an integrated planning system to improve the merchandise and financial planning for all its categories. The new integrated planning system simplifies and eliminates manual work associated with managing
all categories. The Company also re-engineered all of its core general merchandising processes and streamlined employees
into cross-functional category teams in order to align objectives, accelerate growth of key categories, and improve crossfunctional collaboration.
6
Management ’s Discussion and Analysis
In fiscal 2012, the Company upgraded its retail distribution facility to more efficiently support its retail stores. The project
scope included replacing the warehouse management system and upgrading the material handling equipment. The completion of this project allowed the Company to handle the increased demands of the new growth categories while also sending
more overall product through its distribution centres, thus improving overall margins.
During fiscal 2012, the Company also launched the Galileo project to identify productivity opportunities and initiatives.
To date, under the umbrella of Galileo, the Company has implemented hundreds of initiatives that have improved operating
efficiency while also enhancing employee and customer engagement. These initiatives support the continued investments in the
Company’s overall business transformation. One of the key Galileo projects in fiscal 2014 was systematically organizing retail
store backrooms in order to drive retail productivity and improve merchandise management.
Going forward, the Company continues to target processes for re-engineering, cost rationalization, and improving customer
value. Fiscal 2015 will focus on continuing to drive end-to-end productivity, including supply chain projects to improve the
flow of merchandise and margin expansion initiatives.
Employee Engagement
Indigo’s strategic efforts continue to focus on building and maintaining high levels of employee engagement. In fiscal 2014,
the Company conducted an employee engagement survey which showed year-over-year increases in engagement. In May 2014,
Indigo’s employee engagement focus was also recognized outside of the Company, with Indigo being named as the top Canadian
retail employer brand by Randstad Canada for the second year in a row. The award is based on the polling of job seekers in
search of employment opportunities in Canada’s leading organizations.
The Company realizes that sustaining high levels of employee engagement is an ongoing responsibility and continues to
commit resources to specific initiatives designed to make Indigo one of the best places to work. Efforts to boost employee
satisfaction include the continuous improvement of core work process design and the implementation of systems upgrades;
improvements to communication, training and development, and performance management are also ongoing. In fiscal 2014,
the Company’s employee engagement efforts focused on improving the core work processes, tools and structure of Indigo’s
general merchandising teams. During fiscal 2014, the Company also launched a new training module to all new and seasonal
store staff to accelerate sales and service capabilities.
In addition to identifying productivity opportunities, the Galileo project, discussed above, also drives employee engagement by empowering all employees to participate in improving the customer and employee experiences. All employees can
interact with the internal Galileo social media platform. This platform is designed to capture and cultivate innovation by
providing the opportunity for employees to submit, review, vote, and comment on ideas for improving the employee and
customer experiences. The Galileo project and the social media platform have been embraced by employees, and project
successes are recognized and celebrated internally. Based on employee feedback, improvements to the Galileo processes and
social media platform were implemented in fiscal 2014 and will continue to be implemented going forward.
Online Development and Redesign
Reshaping Indigo’s physical store offerings means the online store must also continue to adapt and change. The website redesign
completed at the end of fiscal 2013 included much richer visual presentations of lifestyle, paper and toy categories, a simplified
checkout experience, a much enhanced mobile experience, a comprehensive gift finder, and an innovative drag and drop
capability to ease online shopping. Social media integration, including Facebook, Pinterest, and Twitter, also remain a priority.
To further improve the online customer experience, Indigo launched “buy online, ship to store” in fiscal 2013, an initiative
that allows customers to buy products online and have the items shipped to one of our stores for free. This service provides
customers with additional flexibility to decide where and when purchases are picked up and reduces Indigo’s shipping costs.
In fiscal 2014, the Company launched a new mobile application for the iOS and Android platforms to offer a truly integrated and rich experience across Indigo’s retail and online channels. Customers can use the mobile application to shop-onthe-go by making purchases online or to check retail inventory prior to visiting a store. Additionally, the application allows
customers to scan a product barcode in-store, purchase the product online, and have it shipped to the location of their choice.
Annual Report 2014
7
Personalization is also a key feature of the application, allowing users to create wish lists and access their plum rewards data.
Going forward, the Company will continue to focus on increasing integration across its channels to provide a rich omni-channel
shopping experience.
Results of Operations
The following three tables summarize selected financial and operational information for the Company for the periods indicated.
The classification of financial information presented below is specific to Indigo and may not be comparable to that of other
retailers. The selected financial information is derived from the audited consolidated financial statements for the 52-week
periods ended March 29, 2014, March 30, 2013, and March 31, 2012.
Key elements of the consolidated statements of earnings (loss) and comprehensive earnings (loss) for the periods indicated
are shown in the following table:
(millions of Canadian dollars)
Revenues
Cost of sales
Cost of operations
Selling, administrative and other expenses
Adjusted EBITDA1
52-week
period ended
March 29,
2014
867.7
(494.0)
(280.2)
(93.4)
0.1
%
Revenues
52-week
period ended
March 30,
2013
%
Revenues
100.0
56.9
32.3
10.8
0.0
878.8
(495.1)
(273.7)
(81.5)
28.5
100.0
56.3
31.1
9.3
3.2
1 Earnings before interest, taxes, depreciation, amortization, impairment, and equity investment. Also see “Non-IFRS Financial Measures”.
Selected financial information of the Company for the last three fiscal years is shown in the following table:
(thousands of Canadian dollars, except per share data)
Revenues
Superstores
Small format stores
Online (including store kiosks)
Other
Earnings (loss) and comprehensive earnings (loss)
for the period from continuing operations1
Net earnings (loss) and comprehensive earnings (loss)
for the period
Total assets
Long-term debt (including current portion)
Working capital
Basic earnings (loss) per share from continuing operations1
Basic earnings (loss) per share
Diluted earnings (loss) per share
1 Excludes Kobo discontinued operations.
8
Management ’s Discussion and Analysis
52-week
period ended
March 29,
2014
52-week
period ended
March 30,
2013
52-week
period ended
March 31,
2012
617,791
127,388
102,016
20,473
867,668
626,628
137,642
91,907
22,608
878,785
656,530
145,247
91,279
27,093
920,149
(30,999)
4,288
(30,999)
512,588
811
189,696
4,288
569,140
1,478
224,343
$(1.21)
$(1.21)
$(1.21)
$0.17
$0.17
$0.17
(27,827)
66,189
591,752
2,201
223,701
$(1.10)
$3.68
$3.64
Selected operating information of the Company for the last three fiscal years is shown in the following table:
Comparable Store Sales 1
Superstores
Small format stores
Stores Opened
Superstores
Small format stores
Stores Closed
Superstores
Small format stores
Number of Stores Open at Year-End
Superstores
Small format stores
Selling Square Footage at Year-End
Superstores
Small format stores
52-week
period ended
March 29,
2014
52-week
period ended
March 30,
2013
52-week
period ended
March 31,
2012
(0.9%)
(5.0%)
(4.6%)
(2.4%)
(1.9%)
(0.8%)
–
–
–
–
–
–
–
–
–
2
3
5
–
9
9
–
7
7
95
131
226
97
134
231
97
143
240
2,200
370
2,570
2,235
379
2,614
2,235
400
2,635
(in thousands)
1 See “Non-IFRS Financial Measures”.
Revenue Decreased
Total consolidated revenues for the 52-week period ended March 29, 2014 decreased $11.1 million or 1.3% to $867.7 million from $878.8 million for the 52-week period ended March 30, 2013. The decrease was driven by declining book and
eReader sales, higher sales discounts, reduced loyalty card sales, and the Company operating five fewer stores than last year.
The decrease was partially offset by double-digit growth in lifestyle, paper, and toy sales along with continued growth in
online sales. Book sales decreased mainly due to the phenomenal success of the Fifty Shades and Hunger Games trilogies in the prior
year. Excluding the impact of these blockbuster titles, total consolidated revenues increased by 1.3% compared to last year.
Comparable store sales for the fiscal year decreased 0.9% in superstores and 5.0% in small format stores. The decrease
was mainly driven by the reasons mentioned above. Excluding the blockbuster titles, comparable store sales increased 1.3%
in superstores and 0.4% in small format stores. Comparable store sales are defined as sales generated by stores that have been
open for more than 12 months on a 52-week basis. It is a key performance indicator for the Company as this measure excludes
sales fluctuations due to store closings, permanent relocation, and chain expansion. As at March 29, 2014, the Company operated two fewer superstores and three fewer small format stores compared to March 30, 2013.
Online sales increased by $10.1 million or 11.0% to $102.0 million for the 52-week period ended March 29, 2014 compared to $91.9 million last year. Although in-store physical book sales have declined, online book sales continue to increase
as more customers purchase books online instead of in-store. Additionally, online sales of lifestyle, paper, and toy products continue to grow, benefiting from the Company’s investments in growing its online customer base and from IT enhancements,
such as the website redesign launched at the end of the last fiscal year and the launch of the mobile application in fiscal 2014.
Annual Report 2014
9
Revenues from other sources include revenues generated through irewards card sales, revenue from unredeemed gift
cards (“gift card breakage”), revenue from unredeemed plum points (“Plum breakage”), and revenue-sharing with Kobo.
Revenues from other sources decreased $2.2 million or 9.7% to $20.5 million for the 52-week period ended March 29, 2014
compared to $22.7 million last year primarily as a result of lower irewards membership income. irewards card sales have
decreased by $2.4 million compared to last year. This decrease is consistent with the Company’s expectations as members
moved to the free plum rewards program. As more members participate in Plum and earn more points, the Company recognizes increased revenue from Plum breakage. The reduction in irewards revenue has been partially offset by higher revenues
earned from Plum breakage. Plum breakage revenue increased by $0.7 million compared to last year.
Revenues by channel are highlighted below:
(millions of Canadian dollars)
Superstores
Small format stores
Online (including store kiosks)
Other
52-week
period ended
March 29,
2014
617.8
127.4
102.0
20.5
867.7
52-week
period ended
March 30,
2013
626.6
137.6
91.9
22.7
878.8
% increase
(decrease)
Comparable
store sales
% increase
(decrease)
(1.4)
(7.4)
11.0
(9.7)
(1.3)
(0.9)
(5.0)
N/A
N/A
(1.6)
52-week
period ended
March 29,
2014
52-week
period ended
March 30,
2013
67.4%
27.7%
2.9%
2.0%
100.0%
69.8%
23.6%
4.1%
2.5%
100.0%
Revenues by product line are as follows:
Print 1
General merchandise 2
eReading 3
Other 4
Total
1
2
3
4
Includes
Includes
Includes
Includes
books, calendars, magazines, and newspapers.
lifestyle, paper, toys, music, DVDs, and electronics.
eReaders, eReader accessories, and Kobo revenue share.
cafés, irewards, gift card breakage, and Plum breakage.
A reconciliation between total revenues and comparable store sales is provided below:
Superstores
(millions of Canadian dollars)
Total revenues
Adjustments for stores not in
both fiscal periods
Comparable store sales
10
Management ’s Discussion and Analysis
52-week
period ended
March 29,
2014
Small format stores
52-week
period ended
March 30,
2013
52-week
period ended
March 29,
2014
52-week
period ended
March 30,
2013
617.8
626.6
127.4
137.6
(1.1)
616.7
(4.3)
622.3
(1.3)
126.1
(4.9)
132.7
Cost of Sales (as a Percent of Revenues) Remained Flat
Cost of sales includes the landed cost of goods sold, online shipping costs, inventory shrink and damage reserve, less all vendor
support programs. Cost of sales decreased $1.1 million to $494.0 million, compared to $495.1 million last year. The decrease
was driven by lower retail sales volumes, as discussed above. This decrease was partially offset by a $1.6 million increase in
vendor support. Cost of sales as a percent of total revenues increased by 0.6% to 56.9%, compared to 56.3% last year. The
percentage increase was mainly due to increased discounting and higher markdowns to clear seasonal merchandise.
Cost of Operations Increased Over Last Year
Cost of operations includes all store, online, and distribution centre costs. Cost of operations increased $6.5 million to
$280.2 million this year, compared to $273.7 million last year. As a percent of total revenues, cost of operations increased by
1.2% to 32.3% this year, compared to 31.1% last year. The increase was primarily driven by a $4.8 million, or 25.8%, increase
in online costs compared to last year. Higher online costs were driven by higher fulfilment costs resulting from the increase in
online sales volumes, increased digital marketing spend to drive sales and continued growth of the Company’s customer base,
and technical improvements to the Company’s website. Store occupancy costs were also $2.2 million higher compared to last
year as a result of contractual increases in leasing costs.
Selling, Administrative and Other Expenses Increased Compared to Last Year
Selling, administrative and other expenses include retail marketing, head office costs, and operating expenses associated with
the Company’s transformation. These expenses increased $11.9 million to $93.4 million, compared to $81.5 million last year.
Expenses increased as the Company continued its transformational journey by investing in all areas of home office. Specifically,
the Company made operating investments in expanding merchandising space within its existing superstores to support growth
categories, in launching its new Indigotech™ business and in exiting certain businesses, in marketing to drive consumer awareness of new products in key growth categories, and in additional talent to enhance its digital capabilities and to support the
growth of the general merchandise categories. The Company also recognized higher severance costs due to a reorganization
of its workforce during the fourth quarter. As a percent of total revenues, selling, administrative and other expenses increased
by 1.5% to 10.8%, compared to 9.3% last year.
Adjusted EBITDA Decreased Versus Last Year
Adjusted EBITDA, defined as earnings before interest, taxes, depreciation, amortization, impairment, and equity investment
decreased $28.4 million to $0.1 million for the 52-week period ended March 29, 2014, compared to $28.5 million for the
52-week period ended March 30, 2013. Adjusted EBITDA as a percent of revenues decreased 3.2% to 0.0% this year from
3.2% last year. The decrease was driven by lower book sales in the first half of the current fiscal year due to a lack of blockbuster titles compared to sales of the Fifty Shades and Hunger Games trilogies last year, along with higher current year expenses
related to the Company’s transformational strategy to become the premier year-round gifting destination in Canada
Depreciation, Amortization, and Asset Impairments Increased Compared to Last Year
Depreciation and amortization for the 52-week period ended March 29, 2014 decreased by $0.4 million to $27.5 million
compared to $27.9 million last year. Capital expenditures in fiscal 2014 totalled $29.3 million and included $15.2 million for
store construction, renovations and equipment, $10.5 million for intangible assets (primarily application software and internal
development costs), and $3.6 million for technology equipment. Of the $3.6 million expenditure in technology equipment,
$0.1 million was financed through finance leases. The increase in capital expenditures in the current year was due to greater
spending on capital projects as the Company continues to implement its transformation strategy.
Annual Report 2014
11
The Company assesses at each reporting date whether there is any indication that capital assets may be impaired. The
Company identified impairment and reversal indicators for certain cash-generating units (“CGUs”) and groups of CGUs. For
capital assets which can be reasonably and consistently allocated to individual stores, the store level is used as the CGU. As a
result of identifying impairment and reversal indicators, the Company performed testing which could result in the recognition
and reversal of impairment losses. Recoverable amounts for CGUs being tested are based on value in use, which is calculated
from discounted cash flow projections over the remaining lease terms, plus any renewal options where renewal is likely.
The Company had $2.6 million of capital asset impairments and no capital asset impairment reversals during fiscal 2014.
Last year, the Company recognized $1.3 million in capital asset impairments and $1.0 million in impairment reversals. For
both years, impairment losses arose due to stores performing at lower-than-expected profitability and impairment reversals
arose due to improved store performance and the likelihood of lease term renewals. All of the impairment losses and reversals were spread across a number of CGUs at the store level.
Net Interest Income Remained Flat
The Company recognized net interest income of $2.3 million this year compared to $2.5 million last year. The Company nets
interest income against interest expense.
Earnings from Equity Investment Decreased
The Company uses the equity method to account for its investment in Calendar Club and recognizes its share of Calendar
Club’s earnings and losses as part of consolidated net earnings and losses. Indigo recognized net earnings from Calendar Club
of $0.8 million this year compared to net earnings of $1.3 million last year. Total sales remained nearly flat to last year, but
Calendar Club operated 16 additional kiosks in fiscal 2014, which increased operating costs. In addition, Calendar Club had
less favourable locations in premier malls this year, which impacted their earnings.
Income Tax Expense Increased Due to Valuation Allowance
The Company recognized income tax expense of $4.1 million this year compared to an income tax recovery of $0.1 million last
year. The higher income tax expense was driven by an $11.6 million valuation allowance recorded against deferred tax assets
in fiscal 2014. The valuation allowance was determined under IAS 12, “Income Taxes,” based on management’s best estimate
of future taxable income that the Company expects to achieve from reviewing its latest forecast. The time period used to
determine the valuation allowance under IAS 12 was significantly shorter than the expiration period of the tax loss carryforwards. As such, the economic benefits of the deferred tax assets have not decreased, as management expects to fully utilize
all deferred tax assets prior to expiry. The Company’s effective tax rate was (15.2)% this year compared to (2.3)% last year.
Net Earnings Decreased from Last Year
The Company recognized net loss of $31.0 million for the 52-week period ended March 29, 2014 ($1.21 net loss per common
share), compared to net earnings of $4.3 million ($0.17 net earnings per common share) last year. As discussed above, the
decrease was driven by lower revenues, increases in cost of operations and selling, administrative and other expenses, and higher
income tax expense.
12
Management ’s Discussion and Analysis
Seasonality and Fourth Quarter Results
Indigo’s business is highly seasonal and follows quarterly sales and profit (loss) fluctuation patterns, which are similar to those
of other retailers that are highly dependent on the December holiday sales season. A disproportionate amount of revenues and
profits are earned in the third quarter. As a result, quarterly performance is not necessarily indicative of the Company’s performance for the rest of the year. The following table sets out revenues, net earnings (loss) attributable to shareholders of the
Company, basic and diluted earnings (loss) per share for the preceding eight fiscal quarters.
Fiscal quarters
Q4
Fiscal
2014
Q3
Fiscal
2014
Q2
Fiscal
2014
Q1
Fiscal
2014
Q4
Fiscal
2013
Q3
Fiscal
2013
Q2
Fiscal
2013
Q1
Fiscal
2013
Revenues
184,333
332,393
179,417
171,525
183,976
322,620
185,563
186,626
Total net earnings (loss)
(14,378)
8,497
(10,070)
(15,048)
(8,247)
22,035
(4,013)
(5,487)
Basic earnings (loss) per share
$(0.56)
$0.33
$(0.39)
$(0.59)
$(0.32)
$0.86
$(0.16)
$(0.22)
Diluted earnings (loss) per share
$(0.56)
$0.33
$(0.39)
$(0.59)
$(0.32)
$0.86
$(0.16)
$(0.22)
(thousands of Canadian dollars,
except per share data)
The Company saw an improvement in consolidated revenues in the fourth quarter of fiscal 2014 against last year due to strong
growth in online revenue. Revenues increased by $0.3 million to $184.3 million compared to $184.0 million in the same
quarter last year. Online sales increased by $2.8 million, or 13.1%, to $24.1 million compared to $21.3 million in the same
quarter last year. Comparable store sales increased 1.4% in superstores and decreased 3.1% in small format stores.
Net loss in the fourth quarter of fiscal 2014 was $14.4 million compared to a loss of $8.2 million in the same quarter
last year. Although fourth quarter revenues increased by $0.3 million compared to the same period last year, the Company
collected $1.1 million less vendor support and cost of operations and selling, administrative and other expenses increased
$3.9 million. As previously discussed, the higher expenses were primarily driven by investments made in relation to the
Company’s ongoing transformational strategy.
Overview of Consolidated Balance Sheets
Total Assets
As at March 29, 2014, total assets decreased $56.5 million to $512.6 million, compared to $569.1 million as at March 30, 2013.
The decrease was primarily due to a $53.0 million decrease in cash and cash equivalents. The Company used its cash to make
significant investments in capital assets and working capital as part of its transformation strategy. Capital asset purchases in
fiscal 2014 totalled $29.3 million compared to $19.1 million last year as the Company made significant investments in store
renovations and updated information systems as part of its transformation strategy. The Company also used $19.2 million of
cash towards working capital in the current year compared to generating $1.1 million of cash from working capital last year.
The Company’s changing product assortment now includes more items with shorter payment terms, which drove the increased
use of cash towards working capital.
Total Liabilities
As at March 29, 2014, total liabilities decreased $17.9 million to $200.9 million, compared to $218.8 million as at March 30,
2013. The decrease was primarily the result of a $14.9 million decrease in current and long-term accounts payable and
accrued liabilities. As discussed above, the Company’s changing product assortment now includes more items with shorter
payment terms, which drove the decrease in current and long-term accounts payable and accrued liabilities. Changes to the
Company’s product assortment is a significant component of the Company’s transformation strategy.
Annual Report 2014
13
Total Equity
Total equity at March 29, 2014 decreased $38.6 million to $311.7 million, compared to $350.3 million as at March 30, 2013.
The decrease in total equity was primarily due to net loss of $31.0 million and $8.3 million of dividend payments. Share capital
increased by less than $0.1 million due to the exercise of stock options. Contributed surplus increased $0.7 million as the
expensing of employee stock options and Directors’ deferred share units was partially offset by the Company’s one-time
options repurchase. In the first quarter of fiscal 2014, the Company offered a one-time cash repurchase to certain option
holders. Unamortized expense related to repurchased options was immediately recognized and increased contributed surplus
by $0.5 million. The increase was offset by the $1.0 million cash payment made to the option holders.
Working Capital and Leverage
The Company reported working capital of $189.7 million as at March 29, 2014, compared to $224.3 million as at March 30,
2013. The decrease was driven by the $53.0 million decrease in cash and cash equivalents discussed above, as the Company
had significant expenditures related to its transformation strategy.
The Company’s leverage position (defined as Total Liabilities to Total Equity) remained flat at 0.6:1 year-over-year as both
total liabilities and total equity decreased by a similar percentage.
Overview of Consolidated Statements of Cash Flows
Cash and cash equivalents decreased $53.0 million during fiscal 2014 compared to an increase of $3.8 million last year. The
decrease in fiscal 2014 was driven by cash flows used in operating activities of $17.3 million, investing activities of $25.6 million, financing activities of $10.2 million, and the effect of foreign currency exchange rate changes on cash and cash equivalents
of $0.1 million.
Cash Flows from Operating Activities
The Company used cash flows of $17.3 million from operating activities in fiscal 2014 compared to generating $30.4 million
last year, a decrease of $47.7 million. The Company used $19.2 million of cash for working capital this year compared to generating $1.1 million of cash from working capital last year and had a net loss of $31.0 million this year compared to net earnings
of $4.3 million last year. The Company also had $2.6 million of capital asset impairments in the current year compared to
$0.3 million last year. For both years, impairment losses arose due to stores performing at lower-than-expected profitability.
Cash Flows from Investing Activities
Total cash spent on capital projects in fiscal 2014 was $29.2 million compared to $19.1 million spent last year, as outlined below:
(millions of Canadian dollars)
Store construction, renovations and equipment
Intangible assets (primarily application software
and internal development costs)
Technology equipment
52-week
period ended
March 29,
2014
52-week
period ended
March 30,
2013
15.2
7.1
10.5
3.5
29.2
9.6
2.4
19.1
The Company used cash flows of $25.6 million for investing activities in fiscal 2014 compared to $15.1 million used by investing activities last year, an increase of $10.5 million. The increase was due to greater spending on capital projects as the
Company continues to implement its transformation strategy. Distributions from the equity investment in Calendar Club
were $1.2 million in the current year compared to $1.3 million last year. The Company also received $2.5 million of interest
in the current year compared to $2.7 million last year.
14
Management ’s Discussion and Analysis
Cash Flows from Financing Activities
The Company used cash flows of $10.2 million for financing activities in fiscal 2014 compared to using $12.0 million last
year, a decrease of $1.8 million. The Company paid $8.3 million of dividend payments in fiscal 2014 compared to $11.1 million of dividend payments last year. The decrease in dividend payments resulted from the suspension of quarterly dividend
payments beyond December 3, 2013. This decrease was partially offset by an increased use of cash in fiscal 2014 as a result of
the Company’s options repurchase, as previously discussed. The cash payment for the options repurchase was $1.0 million.
Liquidity and Capital Resources
The Company has a highly seasonal business which generates the majority of its revenues and cash flows during the December
holiday season. Indigo has minimal accounts receivable and a significant portion of book products are purchased on trade terms
with the right to return. Indigo’s main sources of capital are cash flows generated from operations, long-term debt, and cash
and cash equivalents.
The Company’s contractual obligations due over the next five years are summarized below:
(millions of Canadian dollars)
Operating leases
Finance lease obligations
Total obligations
Less than 1 year
1-3 years
4-5 years
After 5 years
Total
57.6
0.6
58.2
89.7
0.2
89.9
51.6
–
51.6
6.9
–
6.9
205.8
0.8
206.6
Based on the Company’s liquidity position and cash flow forecast, management expects its current cash position and cash flows
generated from operations to be sufficient to meet its working capital needs and debt service requirements for fiscal 2015.
As a result, the Company cancelled its revolving line of credit on June 12, 2013. In addition, Indigo has the ability to reduce
capital spending to fund debt requirements if necessary; however, a long-term decline in capital expenditures may negatively
impact revenues and profit growth. In order to maintain sufficient capital resources to fund the Company’s transformation,
management and the Company’s Board of Directors decided to suspend quarterly dividend payments beyond December 3, 2013.
Future declaration of quarterly dividends and the establishment of future record and payment dates are subject to the final
determination of the Company’s Board of Directors.
There can be no assurance that operating levels will not deteriorate over the ensuing fiscal year, which could result in the
Company being unable to meet its current working capital and debt service requirements. In addition, other factors not presently
known to management could materially and adversely affect Indigo’s future cash flows. In such events, the Company would
be required to obtain additional capital as is necessary to satisfy its working capital and debt service requirements from other
sources. Alternative sources of capital could result in increased dilution to shareholders and may be on terms that are not
favourable to the Company.
Accounting Policies
Critical Accounting Judgments and Estimates
The discussion and analysis of Indigo’s operations and financial condition are based upon the consolidated financial statements,
which have been prepared in accordance with IFRS. The preparation of the consolidated financial statements in conformity
with IFRS requires the Company to use judgment and estimation to assess the effects of several variables that are inherently
uncertain. These judgments and estimates can affect the reported amounts of assets, liabilities, revenues, and expenses. The
Company bases its judgments and estimates on historical experience and other assumptions which management believes to
be reasonable under the circumstances. The Company also evaluates its judgments and estimates on an ongoing basis. Methods
for determining all material judgments and estimates are consistent with those used in prior periods. The critical accounting
judgments and estimates and significant accounting policies of the Company are described in notes 3 and 4 of the consolidated financial statements.
Annual Report 2014
15
The following items in the consolidated financial statements involve significant judgment or estimation.
Use of judgment
The preparation of the consolidated financial statements in conformity with IFRS requires the Company to make judgments,
apart from those involving estimation, in applying accounting policies that affect the recognition and measurement of assets,
liabilities, revenues, and expenses. Actual results may differ from the judgments made by the Company. Information about
judgments that have the most significant effect on recognition and measurement of assets, liabilities, revenues, and expenses
are discussed below. Information about significant estimates is discussed in the following section.
Impairment
An impairment loss is recognized for the amount by which the carrying amount of an asset or a cash-generating unit (“CGU”)
exceeds its recoverable amount. The Company uses judgment when identifying CGUs and when assessing for indicators
of impairment.
Intangible assets
Initial capitalization of intangible asset costs is based on the Company’s judgment that technological and economic feasibility
are confirmed and the project will generate future economic benefits by way of estimated future discounted cash flows that
are being generated.
Leases
The Company uses judgment in determining whether a lease qualifies as a finance lease arrangement that transfers substantially all the risks and rewards incidental to ownership.
Deferred tax assets
The recognition of deferred tax assets is based on the Company’s judgment. The assessment of the probability of future taxable
income in which deferred tax assets can be utilized is based on management’s best estimate of future taxable income that the
Company expects to achieve from reviewing its latest forecast. This estimate is adjusted for significant non-taxable income
and expenses and for specific limits to the use of any unused tax loss or credit. Deferred tax assets are recognized to the extent
that it is probable that taxable profit will be available against which the deductible temporary differences and the carryforward
of unused tax credits and unused tax losses can be utilized. Any difference between the gross deferred tax asset and the amount
recognized is recorded on the balance sheet as a valuation allowance. If the valuation allowance decreases as the result of subsequent events, the previously recognized valuation allowance will be reversed. The recognition of deferred tax assets that are
subject to certain legal or economic limits or uncertainties are assessed individually by the Company based on the specific facts
and circumstances.
Use of estimates
The preparation of the consolidated financial statements in conformity with IFRS requires the Company to make estimates
and assumptions in applying accounting policies that affect the recognition and measurement of assets, liabilities, revenues, and
expenses. Actual results may differ from the estimates made by the Company, and actual results will seldom equal estimates.
Information about estimates that have the most significant effect on the recognition and measurement of assets, liabilities,
revenues, and expenses are discussed below.
16
Management ’s Discussion and Analysis
Revenues
The Company recognizes revenue from gift card breakage if the likelihood of gift card redemption by the customer is considered to be remote. The Company estimates its average gift card breakage rate based on historical redemption rates. The resulting
revenue is recognized over the estimated period of redemption based on historical redemption patterns commencing when
the gift cards are sold.
The Indigo plum rewards program allows customers to earn points on their purchases. The fair value of Plum points is
calculated by multiplying the number of points issued by the estimated cost per point. The estimated cost per point is based
on many factors, including the expected future redemption patterns and associated costs. On an ongoing basis, the Company
monitors trends in redemption patterns (redemption at each reward level), historical redemption rates (points redeemed as
a percentage of points issued) and net cost per point redeemed, adjusting the estimated cost per point based upon expected
future activity. Points revenue is included with total revenues in the Company’s consolidated statements of earnings (loss) and
comprehensive earnings (loss).
Inventories
The future realization of the carrying amount of inventory is affected by future sales demand, inventory levels, and product
quality. At each balance sheet date, the Company reviews its on-hand inventory and uses historical trends and current inventory mix to determine a reserve for the impact of future markdowns which will take the net realizable value of inventory
on-hand below cost. Inventory valuation also incorporates a write-down to reflect future losses on the disposition of obsolete
merchandise. The Company reduces inventory for estimated shrinkage that has occurred between physical inventory counts
and the end of the fiscal year based on historical experience as a percentage of sales. In addition, the Company records a vendor
settlement accrual to cover any disputes between the Company and its vendors. The Company estimates this reserve based
on historical experience of settlements with its vendors.
Share-based payments
The cost of equity-settled transactions with counterparties is based on the Company’s estimate of the fair value of share-based
instruments and the number of equity instruments that will eventually vest. The Company’s estimated fair value of the sharebased instruments is calculated using the following variables: risk-free interest rate; expected volatility; expected time until
exercise; and expected dividend yield. Risk-free interest rate is based on Government of Canada bond yields, while all other
variables are estimated based on the Company’s historical experience with its share-based payments.
Impairment
To determine the recoverable amount of an impaired asset, the Company estimates expected future cash flows at the CGU
level and determines a suitable discount rate in order to calculate the present value of those cash flows. In the process of
measuring expected future cash flows, the Company makes assumptions about future sales, gross margin rates, expenses, capital expenditures, and working capital investments which are based upon past and expected future performance. Determining
the applicable discount rate involves estimating appropriate adjustments to market risk and to Company-specific risk factors.
Property, plant and equipment and intangible assets (collectively, “capital assets”)
Capital assets are depreciated over their useful lives, taking into account residual values where appropriate. Assessments of
useful lives and residual values are performed annually and take into consideration factors such as technological innovation,
maintenance programs, and relevant market information. In assessing residual values, the Company considers the remaining
life of the asset, its projected disposal value, and future market conditions.
Annual Report 2014
17
Accounting Standards Implemented in Fiscal 2014
Adoption of these amendments and standards in fiscal 2014 impacted the Company’s results of operations, financial position,
and disclosures as follows:
• Joint Arrangements (“IFRS 11”) replaces IAS 31, “Interests in Joint Ventures” (“IAS 31”) and SIC-13, “Jointly-controlled
Entities – Non-monetary Contributions by Venturers,” and requires that a party in a joint arrangement assess its rights and
obligations to determine the type of joint arrangement and account for those rights and obligations accordingly. Previously,
the Company accounted for its interest in Calendar Club under IAS 31 using proportionate consolidation. However, the
Company concluded that its interest in Calendar Club does not meet the definition of a joint arrangement under IFRS 11
and needs to be accounted for under “Investments in Associates and Joint Ventures” (“IAS 28”) as a significant investment
using the equity method. The Company has retrospectively restated its comparative financial statements to reclassify proportionately consolidated Calendar Club operating results into a single equity investment line. These restatements have no
impact to the Company’s total net earnings (loss) or cash flows. The impact of reclassification on the Company’s financial
statements is as follows:
(thousands of Canadian dollars)
Decrease in revenues
Decrease in expenses
Increase in equity investment
52-week
period ended
March 30,
2013
(15,272)
(13,957)
1,315
(thousands of Canadian dollars)
As at
March 30,
2013
As at
April 1,
2012
Decrease in assets
Increase in equity investment
Decrease in liabilities
(2,074)
968
(1,106)
(1,746)
961
(785)
• Amendments to Investments in Associates and Joint Ventures (“IAS 28”) impact accounting for associates and joint ventures
held for sale and changes in interests held in associates and joint ventures; and
• Disclosure of Interests in Other Entities (“IFRS 12”) includes all of the disclosures that were previously in IAS 27, “Separate
Financial Statements,” IAS 31 and IAS 28, “Investments in Associates.” These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates, and structured entities.
Adoption of the following amendments and standards in fiscal 2014 did not have an impact on the Company’s results of operations, financial position, or disclosures:
• Amendments to Presentation of Financial Statements (“IAS 1”) require companies to group together items within other
comprehensive earnings which may be reclassified to net earnings. The amendments are effective for annual periods beginning on or after July 1, 2012 and were applied retrospectively;
• Amendments to Financial Instruments: Disclosures (“IFRS 7”) regarding the offsetting of financial instruments. These
amendments were applied retrospectively and are effective for annual periods beginning on or after January 1, 2013 and
interim periods within those annual periods;
• Fair Value Measurement (“IFRS 13”) provides guidance to improve consistency and comparability in fair value measurements and related disclosures through a fair value hierarchy. This standard was applied prospectively and is effective for
annual periods beginning on or after January 1, 2013;
18
Management ’s Discussion and Analysis
• Amendments to Separate Financial Statements (“IAS 27”) remove all requirements relating to consolidated financial statements. This standard was applied retrospectively and is effective for annual periods beginning on or after January 1, 2013; and
• Consolidated Financial Statements (“IFRS 10”) replaces portions of IAS 27, “Consolidated and Separate Financial
Statements,” supersedes SIC-12, “Consolidation – Special Purpose Entities,” and establishes standards for the presentation
and preparation of consolidated financial statements when an entity controls one or more entities. This standard was applied
retrospectively and is effective for annual periods beginning on or after January 1, 2013.
New Accounting Pronouncements
Impairment of Assets (“IAS 36”)
In May 2013, the IASB issued amendments to IAS 36 which require disclosures about assets or CGUs for which an impairment loss was recognized or reversed during the period. The Company will apply the amendments to IAS 36 as of the first
quarter of its 2015 fiscal year. Additional information will be disclosed through notes to financial statements.
Levies (“IFRIC 21”)
The IASB has issued IFRIC 21, an interpretation which provides guidance on when to recognize a liability for a levy imposed
by a government, both for levies that are accounted for in accordance with IAS 37, “Provisions, Contingent Liabilities and
Contingent Assets,” and those where the timing and amount of the levy is certain. A levy is an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation. This interpretation is applicable for annual periods beginning on or after January 1, 2014 and must be applied retrospectively. The Company will apply
these amendments beginning in the first quarter of fiscal 2015. The Company is assessing the impact of the new interpretation on its consolidated financial statements.
Financial Instruments: Presentation (“IAS 32”)
The IASB has issued amendments to IAS 32 that clarify its requirements for offsetting financial instruments. These amendments must be applied retrospectively and are effective for annual periods beginning on or after January 1, 2014. The Company
will apply these amendments beginning in the first quarter of fiscal 2015. The Company does not expect implementation of
these amendments to have a significant impact on its consolidated financial statements.
Financial Instruments (“IFRS 9”)
The IASB has issued a new standard, IFRS 9, which will ultimately replace IAS 39, “Financial Instruments: Recognition and
Measurement” (“IAS 39”). The replacement of IAS 39 is a multi-phase project with the objective of improving and simplifying
the reporting for financial instruments. Issuance of IFRS 9 provides guidance on the classification and measurement of financial
assets and financial liabilities. Due to the incomplete status of the project, the mandatory effective date of this standard has
not been determined. The Company will evaluate the overall impact on its consolidated financial statements when the final
standard, including all phases, is issued.
Risks and Uncertainties
Competition
The retail book selling business is highly competitive and continues to experience fundamental changes. Specialty bookstores,
independents, other book superstores, regional multi-store operators, supermarkets, drug stores, warehouse clubs, mail order
clubs, Internet booksellers, mass merchandisers, and other retailers continue to sell and even expand physical book offerings,
often at substantially discounted prices. The Canadian retail landscape is also changing as a growing number of international
retailers launch Canadian operations. This increased competition may negatively impact the Company’s revenues and margins.
Annual Report 2014
19
The digital book industry is also highly competitive and is continuing to grow. The number of retailers selling eBooks has
increased, as have the number of retailers selling eReaders. The technology continues to change, with eReader technology
widely available on tablets and mobile devices and new eReading devices being released with expanded capabilities. As the
digital book industry continues to expand and change, increased eBook sales continue to negatively impact physical book sales.
As eBooks are priced lower than physical books, consumers may reduce their future purchases of physical books in favour of
eBooks, which could reduce the Company’s revenues.
Aggressive merchandising or discounting by competitors in the retail, online, or digital sectors could reduce the Company’s
revenues, market share, and operating margins.
Company Transformation
As customers shift spending toward eBooks, the Company continues to adjust its merchandise mix to grow general merchandise categories to offset the erosion of physical book sales and margins. The general merchandise retail landscape contains a
significant amount of competition from established retailers and there can be no assurances that the Company will be able to
gain market share. Furthermore, the Company’s expansion into new markets and general merchandise could place a significant strain on Indigo’s management, operations, technical performance, financial resources, and internal financial control and
reporting functions. The Company will continue to change and modify this strategy and there can be no assurances that the
Company’s strategy will be successful.
Relationships with Suppliers
The Company relies heavily on suppliers to provide book and general merchandise at appropriate margins and in accordance
with agreed-upon terms and timelines. Failure to maintain favorable terms and relationships with suppliers, the absence of
key suppliers, or delays in Indigo’s ability to acquire books or merchandise on time may affect the Company’s ability to compete
in the marketplace. This is especially true as the Company continues to source a greater portion of its products from overseas,
and events causing disruptions of imports, changes in restrictions, or currency fluctuations could negatively impact revenues
and margins of the Company.
Inventory Management
The Company must manage its inventory levels to successfully operate the business. Inability to respond to changing customer
preferences may result in excess inventory which must be sold at lower prices, or an inventory shortage. Additionally, as a result
of purchasing more general merchandise, the Company has an increasing amount of non-returnable inventory. The Company
monitors the impact of customer trends on inventory turnover and obsolescence, but inappropriate inventory levels could
negatively impact the Company’s revenues and financial performance.
Product Quality and Product Safety
The Company sells products produced by third party manufacturers. Some of these products may expose the Company to
potential liabilities and costs associated with defective products, product handling, and product safety. These risks could expose
the Company to product liability claims, damage the Company’s reputation, and lead to product recalls. The Company has
policies and controls in place to manage these risks, including providing third party manufacturers with product safety guidance and maintaining liability insurance.
As part of its growth in general merchandise, the Company sells food products and is subject to risks associated with food
safety. A significant outbreak of food-borne illness or other public health concerns related to food products could result in harm
to the Company’s customers, negative publicity, and product liability claims. The Company has processes in place to identify
risks, communicate to employees and consumers, and to ensure that potentially harmful products are not available for sale.
The Company also applies quality management procedures to ensure it meets all food safety and regulatory requirements.
Although the Company has policies and procedures in place to manage these risks, liabilities and costs related to product
quality and product safety may have a negative impact on the Company’s revenues and financial performance.
20
Management ’s Discussion and Analysis
Leases
The average unexpired lease term of Indigo’s superstores and small format stores is approximately 3.5 years and 2.1 years,
respectively. The Company attempts to renew these leases as they come due on favourable terms and conditions, but is susceptible to volatility in the market for supercentre and shopping mall space. Unforeseen increases in occupancy costs, or costs
incurred as a result of unanticipated store closing and relocation could unfavourably impact the Company’s performance.
Technology and Online
Information management and technology are key components to the ongoing competitiveness and daily operation of the business. If the Company’s investment in technology fails to support our growth initiatives or to keep pace with technological
changes, Indigo’s competitiveness may be compromised. The Company has also increased its investment in developing
improvements to the digital customer experience but there can be no assurances that the Company will be able to recoup its
investment costs. Furthermore, if systems are damaged or cease to function properly, capital investment may be required and
the Company may suffer business interruptions in the interim. Such systems and controls are pervasive throughout our business and failures in their maintenance or development could have a significant adverse effect on the business.
Cybersecurity
A failure in, or breach of, the Company’s operational or security systems or infrastructure, or those of Indigo’s third party
vendors and other service providers, including as a result of cyber attacks, could disrupt the business, result in the disclosure
or misuse of confidential or proprietary information, damage Indigo’s reputation, increase the Company’s costs, and cause
losses. Although Indigo has business continuity plans and other safeguards in place, along with robust information security
procedures and controls, the Company’s business operations may be adversely affected by significant and widespread disruption to Indigo’s physical infrastructure or operating systems that support the Company’s business and customers. As cyber
threats continue to evolve, the Company may be required to expend significant additional resources to continue to modify or
enhance Indigo’s protective measures, or to investigate and remediate any information security vulnerabilities.
Dependence on Key Personnel
Indigo’s continued success will depend to a significant extent upon its management group, who have developed specialized
skills and an in-depth knowledge of the business. The loss of the services of key personnel, particularly Ms. Reisman, could
have a material adverse effect on Indigo. To mitigate the risk of personnel loss, the Company has implemented a number of
employee engagement and retention strategies.
Economic Environment
Traditionally, retail businesses are highly susceptible to market conditions in the economy. A decline in consumer spending,
especially over the December holiday season, could have an adverse effect on the Company’s financial condition. Other variables,
such as unanticipated increases in merchandise costs, higher labour costs, increases in shipping rates or interruptions in shipping
service, or higher interest rates or unemployment rates, could also unfavourably impact the Company’s financial performance.
External Events
Weather conditions, as well as events such as political or social unrest, natural disasters, disease outbreaks, or acts of terrorism,
could have a material adverse effect on the Company’s financial performance. Moreover, if such events were to occur at peak
times in the Company’s annual business cycle, the impact of these events on operating performance could be significantly
greater than they would otherwise have been. The Company has procedures in place to reduce the impact of business interruptions, crises, and potential disasters, but there can be no assurance that these procedures can fully eliminate the negative
impact of such events.
Annual Report 2014
21
Regulatory Environment
The distribution and sale of products, along with communications to customers, are regulated by a number of laws and regulations. Changes to statutes, laws, regulations or regulatory policies, or changes in their interpretation, implementation or
enforcement, could adversely affect the Company’s operations and performance. The Company may also incur significant
costs in the course of complying with any changes to applicable regulations. Failure to comply with applicable regulations
could result in judgment, sanctions, or financial penalties that could adversely impact the Company’s reputation and financial
performance. The Company believes that it has taken reasonable measures designed to ensure compliance with applicable
regulations, but there is no assurance that the Company will always be deemed to be in compliance.
Additionally, the distribution and sale of books is a regulated industry in which foreign ownership is generally not permitted under the Investment Canada Act. As well, the sourcing and importation of books is governed by the Book Importation
Regulations to the Copyright Act (Canada). There is no assurance that the existing regulatory framework will not change in
the future or that it will be effective in preventing foreign-owned retailers from competing in Canada. An increased number
of competitors could have an adverse effect on the Company’s financial performance.
Credit, Foreign Exchange, and Interest Rate Risks
The Company’s maximum exposure to credit risk is equal to the carrying value of accounts receivable. Accounts receivable
primarily consists of receivables from retail customers who pay by credit card, recoveries of credits from suppliers for
returned or damaged products, and receivables from other companies for sales of products, gift cards, and other services.
Credit card payments have minimal credit risk and the limited number of corporate receivables is closely monitored.
The Company’s foreign exchange risk is largely limited to currency fluctuations between the Canadian and U.S. dollars.
Decreases in the value of the Canadian dollar relative to the U.S. dollar could negatively impact net earnings since the purchase
price of some of the Company’s products are negotiated with vendors in U.S. dollars, while the retail price to Indigo’s customers is set in Canadian dollars.
In June 2013, the Company cancelled its revolving line of credit. As such, the Company’s interest rate risk is limited to
its long-term debt, for which interest rates are fixed at the time a contract is finalized. The Company’s interest income is also
sensitive to fluctuations in Canadian interest rates, which affect the interest earned on the Company’s cash and cash equivalents.
The Company has minimal interest rate risk and does not use any interest rate swaps to manage its risk.
Legal Proceedings
In the normal course of business, Indigo becomes involved in various claims and litigation. While the final outcome of such
claims and litigation pending as at March 29, 2014 cannot be predicted with certainty, management believes that any such
amount would not have a material impact on the Company’s financial position.
Trademark and Brand Protection
The Company has developed, and continues to develop, a line of proprietary products as well as various digital innovations.
Infringement on the intellectual property developed by Indigo may have a negative effect on the Company’s financial position.
In order to protect the competitive advantage provided by these products and innovations, the Company has processes in place
to secure and defend its intellectual property.
Workplace Health and Safety
The failure of the Company to adhere to appropriate health and safety procedures and to ensure compliance with applicable
laws and regulations could result in employee injuries, productivity loss, and liabilities to Indigo. To reduce the risk of workplace incidents, the Company has health and safety programs in place and has established policies and procedures aimed at
ensuring compliance with applicable legislative requirements.
22
Management ’s Discussion and Analysis
Compliance with Privacy Laws
In Canada, the Personal Information Protection and Electronic Documents Act (“PIPEDA”) was passed into law by the federal
government effective as of January 1, 2001. Currently, this law applies to all organizations that collect, use, or disclose personal
information in the course of commercial activities, except to the extent that provincial privacy legislation has been enacted
and declared substantially similar to the federal legislation. To date, certain provinces have enacted “substantially similar”
private sector privacy legislation. The federal privacy legislation also regulates the inter-provincial collection, use and disclosure
of personal information. Applicable Canadian privacy laws create certain obligations on organizations that handle personal
information, including obligations relating to obtaining appropriate consent, limitations on use and disclosure of personal
information, and ensuring appropriate security safeguards are in place. In the course of its business, the Company maintains
records containing sensitive information identifying or relating to individual customers and employees. Although the Company
has implemented systems to comply with applicable privacy laws in connection with the collection, use, and disclosure of
such personal information, if a significant failure of such systems was to occur, the Company’s business and reputation could
be adversely affected.
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company is gathered and reported on a timely basis to senior
management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), so that appropriate decisions
can be made by them regarding public disclosure.
As required by National Instrument 52-109, “Certification of Disclosure in Issuers’ Annual and Interim Filings,” the CEO
and CFO have evaluated, or caused to be evaluated under their supervision, the effectiveness of such disclosure controls and
procedures. Based on that evaluation, they have concluded that the design and operation of the system of disclosure controls
and procedures were effective as at March 29, 2014.
Internal Controls over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal controls over financial reporting to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements
for external purposes in accordance with International Financial Reporting Standards.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to consolidated financial statement preparation
and presentation. Additionally, management is necessarily required to use judgment in evaluating controls and procedures.
As required by National Instrument 52-109, “Certification of Disclosure in Issuers’ Annual and Interim Filings,” the CEO
and CFO have evaluated, or caused to be evaluated under their supervision, the effectiveness of such internal controls over
financial reporting using the framework established in the Internal Control – Integrated Framework (“COSO Framework”)
published in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, they
have concluded that the design and operation of the Company’s internal controls over financial reporting were effective as at
March 29, 2014.
Changes in Internal Controls over Financial Reporting
Management has also evaluated whether there were changes in the Company’s internal controls over financial reporting that
occurred during the period beginning on December 29, 2013 and ended on March 29, 2014 that have materially affected, or
are reasonably likely to materially affect, the Company’s internal controls over financial reporting. The Company has determined that no material changes in internal controls over financial reporting have occurred in this period.
Annual Report 2014
23
Cautionary Statement Regarding Forward-Looking Statements
The above discussion includes forward-looking statements. All statements other than statements of historical facts included
in this discussion that address activities, events or developments that the Company expects or anticipates will or may occur
in the future are forward-looking statements. These statements are based on certain assumptions and analysis made by the
Company in light of its experience, analysis and its perception of historical trends, current conditions and expected future
developments as well as other factors it believes are appropriate in the circumstances. However, whether actual results and
developments will conform to the expectations and predictions of the Company is subject to a number of risks and uncertainties, including the general economic, market or business conditions; competitive actions by other companies; changes in
laws or regulations; and other factors, many of which are beyond the control of the Company. Consequently, all of the forward-looking statements made in this discussion are qualified by these cautionary statements and there can be no assurance
that results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have
the expected consequences to, or effects on, the Company.
Non-IFRS Financial Measures
The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards
(“IFRS”). In order to provide additional insight into the business, the Company has also provided non-IFRS data, including
comparable store sales and adjusted EBITDA, in the discussion and analysis section above. These measures are specific to
Indigo and have no standardized meaning prescribed by IFRS. Therefore, these measures may not be comparable to similar
measures presented by other companies.
Comparable stores sales and adjusted EBITDA are key indicators used by the Company to measure performance against
internal targets and prior period results. Both measures are commonly used by financial analysts and investors to compare
Indigo to other retailers. Comparable store sales are defined as sales generated by stores that have been open for more than
12 months on a 52-week basis. It is a key performance indicator for the Company as this measure excludes sales fluctuations
due to store closings, permanent relocation, and chain expansion. Adjusted EBITDA is defined as earnings before interest,
taxes, depreciation, amortization, impairment, and equity investment. The method of calculating adjusted EBITDA is consistent
with that used in prior periods.
A reconciliation between comparable store sales and revenues (the most comparable IFRS measure) was included earlier
in this report. A reconciliation between adjusted EBITDA and earnings (loss) before income taxes (the most comparable IFRS
measure) is provided below:
(millions of Canadian dollars)
Adjusted EBITDA
Depreciation of property, plant and equipment
Amortization of intangible assets
Net impairment of capital assets
Interest on long-term debt and financing charges
Interest income on cash and cash equivalents
Share of earnings from equity investment
Earnings (loss) before income taxes
24
Management ’s Discussion and Analysis
52-week
period ended
March 29,
2014
52-week
period ended
March 30,
2013
0.1
(16.4)
(11.1)
(2.6)
(0.1)
2.4
0.8
(26.9)
28.5
(17.6)
(10.2)
(0.3)
(0.1)
2.6
1.3
4.2
Independent Auditors’ Report
To the Shareholders of Indigo Books & Music Inc.
We have audited the accompanying consolidated financial statements of Indigo Books & Music Inc., which comprise the consolidated balance sheets as at March 29, 2014, March 30, 2013, and April 1, 2012, and the consolidated statements of earnings
(loss) and comprehensive earnings (loss), changes in equity and cash flows for the 52 week periods then ended March 29, 2014
and March 30, 2013 and a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance
with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable
the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our
audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the
auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Indigo Books &
Music Inc. as at March 29, 2014, March 30, 2013 and April 1, 2012 and its financial performance and its cash flows for the 52 week
periods then ended March 29, 2014 and March 30, 2013 in accordance with International Financial Reporting Standards.
Toronto, Canada
May 27, 2014
Chartered Accountants
Licensed Public Accountants
Annual Report 2014
25
Consolidated Balance Sheets
As at
March 29,
2014
(thousands of Canadian dollars)
ASSETS
Current
Cash and cash equivalents (note 6)
Accounts receivable
Inventories (note 7)
Prepaid expenses
Total current assets
Property, plant and equipment (note 8)
Intangible assets (note 9)
Equity investment (note 20)
Deferred tax assets (note 10)
Total assets
LIABILITIES AND EQUITY
Current
Accounts payable and accrued liabilities (note 19)
Unredeemed gift card liability (note 19)
Provisions (note 11)
Deferred revenue
Income taxes payable
Current portion of long-term debt (notes 12 and 18)
Total current liabilities
Long-term accrued liabilities (note 19)
Long-term provisions (note 11)
Long-term debt (notes 12 and 18)
Total liabilities
Equity
Share capital (note 13)
Contributed surplus (note 14)
Retained earnings
Total equity
Total liabilities and equity
See accompanying notes
On behalf of the Board:
Heather Reisman
Director
26
Consolidated Financial Statements and Notes
Michael Kirby
Director
As at
March 30,
2013
restated
(notes 4 and 22)
As at
April 1,
2012
restated
(notes 4 and 22)
157,578
5,582
218,979
5,184
387,323
58,476
21,587
598
44,604
512,588
210,562
7,126
216,533
4,153
438,374
58,903
22,164
968
48,731
569,140
206,718
12,810
229,199
3,692
452,419
66,928
22,810
961
48,633
591,751
136,428
46,827
928
12,860
–
584
197,627
2,896
164
227
200,914
150,177
47,169
2,168
13,733
11
773
214,031
4,004
78
705
218,818
173,416
42,711
232
11,234
65
1,060
228,718
5,800
460
1,141
236,119
203,812
8,820
99,042
311,674
512,588
203,805
8,128
138,389
350,322
569,140
203,373
7,039
145,220
355,632
591,751
Consolidated Statements of Earnings (Loss)
and Comprehensive Earnings (Loss)
(thousands of Canadian dollars, except per share data)
Revenues
Cost of sales
Gross profit
Operating, selling and administrative expenses (notes 8, 9 and 15)
Operating profit (loss)
Interest on long-term debt and financing charges
Interest income on cash and cash equivalents
Share of earnings from equity investment (note 20)
Earnings (loss) before income taxes
Income tax recovery (expense) (note 10)
Current
Deferred
Net earnings (loss) and comprehensive earnings (loss) for the period
Net earnings (loss) per common share
Basic
Diluted
52-week
period ended
March 29,
2014
52-week
period ended
March 30,
2013
restated
(notes 4 and 22)
867,668
(493,955)
373,713
(403,693)
(29,980)
(95)
2,377
789
(26,909)
878,785
(495,099)
383,686
(383,319)
367
(101)
2,609
1,315
4,190
37
(4,127)
(30,999)
–
98
4,288
$(1.21)
$(1.21)
$0.17
$0.17
(note 16)
See accompanying notes
Annual Report 2014
27
Consolidated Statements of Changes in Equity
Share
Capital
Contributed
Surplus
Retained
Earnings
Total
Equity
Balance, March 31, 2012
Earnings for the 52-week period
ended March 30, 2013
Exercise of options (notes 13 and 14)
Directors’ deferred share units converted (note 13)
Stock-based compensation (note 14)
Directors’ compensation (note 14)
Dividends paid (note 13)
Balance, March 30, 2013
203,373
7,039
145,220
355,632
–
417
15
–
–
–
203,805
–
(85)
(15)
743
446
–
8,128
4,288
–
–
–
–
(11,119)
138,389
4,288
332
–
743
446
(11,119)
350,322
Balance, March 30, 2013
Loss for the 52-week period
ended March 29, 2014
Exercise of options (notes 13 and 14)
Directors’ deferred share units converted (note 13)
Stock-based compensation (note 14)
Directors’ compensation (note 14)
Dividends paid (note 13)
Repurchase of options (note 14)
Balance, March 29, 2014
203,805
8,128
138,389
350,322
–
7
–
–
–
–
–
203,812
–
–
–
1,242
425
–
(975)
8,820
(30,999)
–
–
–
–
(8,348)
–
99,042
(30,999)
7
–
1,242
425
(8,348)
(975)
311,674
(thousands of Canadian dollars)
See accompanying notes
28
Consolidated Financial Statements and Notes
Consolidated Statements of Cash Flows
(thousands of Canadian dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) for the period
Add (deduct) items not affecting cash
Depreciation of property, plant and equipment (note 8)
Amortization of intangible assets (note 9)
Net impairment of capital assets (note 8)
Loss on disposal of capital assets
Stock-based compensation (note 14)
Directors’ compensation (note 14)
Deferred tax assets (note 10)
Other
Net change in non-cash working capital balances (note 17)
Interest on long-term debt and financing charges
Interest income on cash and cash equivalents
Income taxes received
Share of earnings from equity investment (note 20)
Cash flows from (used in) operating activities
52-week
period ended
March 29,
2014
52-week
period ended
March 30,
2013
restated
(notes 4 and 22)
(30,999)
4,288
16,358
11,123
2,604
302
1,242
425
4,127
(206)
(19,196)
95
(2,377)
26
(789)
(17,265)
17,638
10,245
250
65
743
446
(98)
(482)
1,089
101
(2,609)
32
(1,315)
30,393
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (note 8)
Addition of intangible assets (note 9)
Distributions from equity investment (note 20)
Interest received
Cash flows used in investing activities
(18,700)
(10,546)
1,159
2,463
(25,624)
(9,441)
(9,621)
1,308
2,691
(15,063)
CASH FLOWS FROM FINANCING ACTIVITIES
Notes payable (note 21)
Repayment of long-term debt
Interest paid
Proceeds from share issuances (note 13)
Dividends paid (note 13)
Repurchase of options (note 14)
Cash flows used in financing activities
–
(814)
(110)
7
(8,348)
(975)
(10,240)
190
(1,200)
(160)
332
(11,119)
–
(11,957)
Effect of foreign currency exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents during the period
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
471
145
(52,984)
210,562
157,578
3,844
206,718
210,562
See accompanying notes
Annual Report 2014
29
Notes to Consolidated Financial Statements
March 29, 2014
1. CORPORATE INFORMATION
Indigo Books & Music Inc. (the “Company” or “Indigo”) is a corporation domiciled and incorporated under the laws of the
Province of Ontario in Canada. The Company’s registered office is located at 468 King Street West, Toronto, Ontario, M5V 1L8,
Canada. The consolidated financial statements of the Company comprise the Company, its equity investment in Calendar Club
of Canada Limited Partnership (“Calendar Club”), and its wholly-owned subsidiary, Soho Inc. The Company is the ultimate
parent of the consolidated organization.
2. NATURE OF OPERATIONS
Indigo is Canada’s largest book, gift and specialty toy retailer and was formed as a result of an amalgamation of Chapters Inc.
and Indigo Books & Music, Inc. under the laws of the Province of Ontario, pursuant to a Certificate of Amalgamation dated
August 16, 2001. The Company operates a chain of retail bookstores across all ten provinces and one territory in Canada,
including 95 superstores (2013 – 97) under the Chapters, Indigo and the World’s Biggest Bookstore names, as well as 131 small
format stores (2013 – 134) under the banners Coles, Indigo, Indigospirit, SmithBooks, and The Book Company. Subsequent to year
end, the Company closed the World’s Biggest Bookstore. In addition, the Company operates indigo.ca, an e-commerce retail destination which sells books, gifts, toys, and paper products. The Company also operates seasonal kiosks and year-round stores
in shopping malls across Canada through Calendar Club.
The Company’s operations are focused on the merchandising of products and services in Canada. As such, the Company
presents one operating segment in its consolidated financial statements.
Indigo also has a separate registered charity under the name Indigo Love of Reading Foundation (the “Foundation”). The
Foundation provides new books and learning material to high-needs elementary schools across the country through donations
from Indigo, its customers, suppliers, and employees.
3. BASIS OF PREPARATION
Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and using the accounting policies described herein.
These consolidated financial statements were approved by the Company’s Board of Directors on May 27, 2014.
Use of judgment
The preparation of the consolidated financial statements in conformity with IFRS requires the Company to make judgments,
apart from those involving estimation, in applying accounting policies that affect the recognition and measurement of assets,
liabilities, revenues, and expenses. Actual results may differ from the judgments made by the Company. Information about
judgments that have the most significant effect on recognition and measurement of assets, liabilities, revenues, and expenses
are discussed below. Information about significant estimates is discussed in the following section.
Impairment
An impairment loss is recognized for the amount by which the carrying amount of an asset or a cash-generating unit (“CGU”)
exceeds its recoverable amount. The Company uses judgment when identifying CGUs and when assessing for indicators
of impairment.
30
Consolidated Financial Statements and Notes
Intangible assets
Initial capitalization of intangible asset costs is based on the Company’s judgment that technological and economic feasibility
are confirmed and the project will generate future economic benefits by way of estimated future discounted cash flows that
are being generated.
Leases
The Company uses judgment in determining whether a lease qualifies as a finance lease arrangement that transfers substantially
all the risks and rewards incidental to ownership.
Deferred tax assets
The recognition of deferred tax assets is based on the Company’s judgment. The assessment of the probability of future taxable
income in which deferred tax assets can be utilized is based on management’s best estimate of future taxable income that the
Company expects to achieve from reviewing its latest forecast. This estimate is adjusted for significant non-taxable income
and expenses and for specific limits to the use of any unused tax loss or credit. Deferred tax assets are recognized to the extent
that it is probable that taxable profit will be available against which the deductible temporary differences and the carryforward
of unused tax credits and unused tax losses can be utilized. Any difference between the gross deferred tax asset and the amount
recognized is recorded on the balance sheet as a valuation allowance. If the valuation allowance decreases as the result of subsequent events, the previously recognized valuation allowance will be reversed. The recognition of deferred tax assets that are
subject to certain legal or economic limits or uncertainties are assessed individually by the Company based on the specific facts
and circumstances.
Use of estimates
The preparation of the consolidated financial statements in conformity with IFRS requires the Company to make estimates
and assumptions in applying accounting policies that affect the recognition and measurement of assets, liabilities, revenues, and
expenses. Actual results may differ from the estimates made by the Company, and actual results will seldom equal estimates.
Information about estimates that have the most significant effect on the recognition and measurement of assets, liabilities,
revenues, and expenses are discussed below.
Revenues
The Company recognizes revenue from unredeemed gift cards (“gift card breakage”) if the likelihood of gift card redemption
by the customer is considered to be remote. The Company estimates its average gift card breakage rate based on historical
redemption rates. The resulting revenue is recognized over the estimated period of redemption based on historical redemption
patterns commencing when the gift cards are sold.
The Indigo plum rewards program (“Plum”) allows customers to earn points on their purchases. The fair value of Plum
points is calculated by multiplying the number of points issued by the estimated cost per point. The estimated cost per point
is based on many factors, including the expected future redemption patterns and associated costs. On an ongoing basis, the
Company monitors trends in redemption patterns (redemption at each reward level), historical redemption rates (points
redeemed as a percentage of points issued) and net cost per point redeemed, adjusting the estimated cost per point based
upon expected future activity. Points revenue is included with total revenues in the Company’s consolidated statements of
earnings (loss) and comprehensive earnings (loss).
Inventories
The future realization of the carrying amount of inventory is affected by future sales demand, inventory levels, and product
quality. At each balance sheet date, the Company reviews its on-hand inventory and uses historical trends and current inventory
mix to determine a reserve for the impact of future markdowns which will take the net realizable value of inventory
on-hand below cost. Inventory valuation also incorporates a write-down to reflect future losses on the disposition of
Annual Report 2014
31
obsolete merchandise. The Company reduces inventory for estimated shrinkage that has occurred between physical inventory
counts and the end of the fiscal year based on historical experience as a percentage of sales. In addition, the Company records
a vendor settlement accrual to cover any disputes between the Company and its vendors. The Company estimates this reserve
based on historical experience of settlements with its vendors.
Share-based payments
The cost of equity-settled transactions with counterparties is based on the Company’s estimate of the fair value of share-based
instruments and the number of equity instruments that will eventually vest. The Company’s estimated fair value of the sharebased instruments is calculated using the following variables: risk-free interest rate; expected volatility; expected time until
exercise; and expected dividend yield. Risk-free interest rate is based on Government of Canada bond yields, while all other
variables are estimated based on the Company’s historical...
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