Indigo Q3 Results Reflect Strong Margin Improvement

- Improved Net Earnings, Growth in Online, Increased Investment to Accelerate Transformation -

TORONTO, Feb. 5, 2013 /CNW/ - Indigo Books & Music Inc. (TSX: IDG), Canada's largest book, gift and specialty toy retailer reported a 4.9% decrease in net revenue for its third quarter ending December 29, 2012. Revenue for the quarter was $335.6 million. The decrease was due to lower eReader revenues and declining book sales, as consumers shift to digital reading, and the absence of any hit books as against two blockbusters last holiday. The decrease in eReader and book revenue was partially offset by continued growth in the gift, lifestyle and toy businesses.

On a comparable store basis, Indigo and Chapters superstores posted a 5.0% decrease in revenue, while Coles and IndigoSpirit small format stores were down 5.2%. Online sales increased 3.6% compared to the same period last year. The increase was driven by growth in the gift, lifestyle and toys businesses and higher book sales.

Indigo generated higher gross profit compared to last year as a result of a 2.2% improvement in margin rate. The improvement in margin rate can be attributed to a shift to higher margin gift and lifestyle products, lower sales discounts, fewer markdowns, and shipping more products through the Company's distribution centres.

In the quarter, the Company continued to make meaningful operating investments in its transformation. Commenting on the results, CEO Heather Reisman said, "We are pleased that our results reflect our efforts to dramatically improve margins and significantly expand our product mix in key categories and online to drive sales growth. We've made great strides during the quarter to accelerate our transformation while reinforcing our position as Canada's preferred destination for gift giving. It is satisfying to know that customers continue to see Indigo as their gift destination of choice."

The net earnings attributable to shareholders of the Company increased $7.6 million from $14.4 million last year to $22.0 million this year. The increase in the net earnings was due to the elimination of losses from discontinued operations as a result of the sale of Kobo in January 2013 partially offset by increased investment in the business transformation. The net earnings per share improved from net earnings of $0.57 per share last year to net earnings of $0.87 per share.

The Board of Directors today approved a quarterly dividend of 11 cents per common share to be paid on March 6, 2013, to all shareholders of record as of February 19, 2013.

During the quarter, Indigo partnered nationally with the Governor General Literary Awards to showcase and support the best of the best in Canadian literature in both English and French.

Forward-Looking Statements
Statements contained in this news release that are not historical facts are forward-looking statements which involve risk and uncertainties that could cause results to differ materially from those expressed in the forward-looking statements. Among the key factors that could cause such differences are: general economic, market or business conditions in Canada; competitive actions by other companies; changes in laws or regulations; and other factors, many of which are beyond the control of the Company.

Non-IFRS Financial Measures

The Company prepares its unaudited interim condensed consolidated financial statements in accordance with International Financial Reporting Standards and International Accounting Standards 34, "Interim Financial Reporting." In order to provide additional insight into the business, the Company has also provided non-IFRS data, including comparative store sales growth, in the press release above. This measure does not have a standardized meaning prescribed by IFRS and is therefore specific to Indigo and may not be comparable to similar measures presented by other companies. Comparative store sales growth is a key indicator used by the Company to measure performance against internal targets and prior period results. This measure is 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.

About Indigo Books & Music Inc.

Indigo is a publicly traded Canadian company listed on the Toronto Stock Exchange (IDG). As the largest book, gift and specialty toy retailer in Canada, Indigo operates in all provinces under different banners including Indigo Books & Music; Indigo Books, Gifts, Kids; IndigoSpirit; Chapters; The World's Biggest Bookstore; and Coles. The online channel, indigo.ca, offers a one-stop online shop with a robust selection of books, toys, home décor, stationery and gifts.

In 2004, Indigo founded the Indigo Love of Reading Foundation, a registered charity that provides new books and education materials to high-needs Canadian elementary schools, to address the literacy crisis in Canada. To date the Foundation, as well as the Indigo "Adopt A School" program, have contributed $13 million, equating to more than a million books, to high-needs elementary schools across Canada. Visit loveofreading.org for more information.

To learn more about Indigo, please visit the Our Company section at indigo.ca.

Consolidated Balance Sheets
(Unaudited)

	As at	As at	As at
	December 29,	December 31,	March 31,
(thousands of Canadian dollars)	2012	2011	2012
ASSETS
Current
Cash and cash equivalents	314,692	148,610	207,601
Accounts receivable	27,075	21,690	12,627
Inventories	242,303	234,705	229,706
Prepaid expenses	4,151	3,915	3,695
Derivatives	-	1,747	-
Assets held for sale	-	117,551	-
Total current assets	588,221	528,218	453,629

Property, plant and equipment	61,085	70,409	67,464
Intangible assets	22,112	22,333	22,810
Goodwill	-	1,216	-
Deferred tax assets	46,310	60,290	48,633
Total assets	717,728	682,466	592,536
LIABILITIES AND EQUITY
Current
Accounts payable and accrued liabilities	272,760	241,553	174,201
Unredeemed gift card liability	63,639	60,959	42,711
Provisions	221	-	232
Deferred revenue	13,882	12,110	11,234
Income taxes payable	111	310	65
Notes payable	-	5,224	-
Current portion of long-term debt	811	1,163	1,060
Liabilities associated with assets held for sale	-	114,400	-
Total current liabilities	351,424	435,719	229,503
Long-term accrued liabilities	4,153	4,820	5,800
Long-term provisions	285	-	460
Long-term debt	856	1,327	1,141
Total liabilities	356,718	441,866	236,904
Equity
Share capital	203,733	203,254	203,373
Contributed surplus	7,858	6,860	7,039
Retained earnings	149,419	16,468	145,220
Total equity attributable to shareholders of Indigo	361,010	226,582	355,632
Non-controlling interest	-	14,018	-
Total equity	361,010	240,600	355,632
Total liabilities and equity	717,728	682,466	592,536

Consolidated Statements of Earnings (Loss) and Comprehensive Earnings (Loss)
(Unaudited)

	13-week	13-week	39-week	39-week
	period ended	period ended	period ended	period ended
	December 29,	December 31,	December 29,	December 31,
(thousands of Canadian dollars, except per share data)	2012	2011	2012	2011

Revenues	335,572	352,858	707,644	738,111
Cost of sales	190,838	208,456	397,713	431,035
Gross profit	144,734	144,402	309,931	307,076
Operating and administrative expenses	115,679	112,721	296,828	320,991
Operating earnings (loss)	29,055	31,681	13,103	(13,915)
Interest on long-term debt and financing charges	29	34	89	117
Interest income on cash and cash equivalents	(685)	(25)	(1,844)	(40)
Earnings (loss) before income taxes	29,711	31,672	14,858	(13,992)
Income tax expense	7,676	7,961	2,323	3,109
Earnings (loss) and comprehensive earnings (loss) for the period from continuing operations	22,035	23,711	12,535	(17,101)
Loss and comprehensive loss for the period from discontinued operations (net of tax)	-	(17,906)	-	(41,679)
Net earnings (loss) and comprehensive earnings (loss) for the period	22,035	5,805	12,535	(58,780)

Net earnings (loss) and comprehensive earnings (loss) attributable to:
Shareholders of Indigo	22,035	14,362	12,535	(38,863)
Non-controlling interest	-	(8,557)	-	(19,917)

Net earnings (loss) per common share from continuing operations
Basic	$0.87	$0.94	$0.50	$(0.68)
Diluted	$0.86	$0.93	$0.49	$(0.68)

Net loss per common share from discontinued operations
Basic	$ -	$(0.37)	$ -	$(0.86)
Diluted	$ -	$(0.37)	$ -	$(0.86)

Net earnings (loss) per common share
Basic	$0.87	$0.57	$0.50	$(1.54)
Diluted	$0.86	$0.56	$0.49	$(1.54)

Consolidated Statements of Cash Flows
(Unaudited)
		13-week	13-week	39-week	39-week
		period ended	period ended	period ended	period ended
		December 29,	December 31,	December 29,	December 31,
(thousands of Canadian dollars)		2012	2011	2012	2011

CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) from continuing operations for the period		22,035	23,711	12,535	(17,101)
Add (deduct) items not affecting cash
	Depreciation of property, plant and equipment	4,427	4,810	13,475	13,826
	Amortization of intangible assets	2,617	2,082	7,554	6,266
	Impairment of capital assets	-	3,956	250	3,956
	Impairment of goodwill	-	-	-	25,416
	Loss on disposal of capital assets	-	50	44	65
	Stock-based compensation	210	196	569	866
	Directors' compensation	101	117	330	384
	Deferred tax assets	7,676	7,961	2,323	3,109
	Other	(175)	2,453	(418)	43
Net change in non-cash working capital balances related to continuing operations		93,699	97,121	92,802	85,620
Interest on long-term debt and financing charges		29	34	89	117
Interest income on cash and cash equivalents		(685)	(25)	(1,844)	(40)
Income taxes received		-	-	45	-
Operating cash flows of discontinued operations		-	(51,874)	-	(68,687)
Cash flows from operating activities		129,934	90,592	127,754	53,840

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of non-capital tax losses		-	-	-	(10,559)
Purchase of property, plant and equipment		(3,401)	(4,682)	(6,949)	(10,530)
Addition of intangible assets		(2,262)	(2,152)	(6,876)	(6,040)
Investing cash flows of discontinued operations		-	(3,289)	-	(7,936)
Cash flows used in investing activities		(5,663)	(10,123)	(13,825)	(35,065)

CASH FLOWS FROM FINANCING ACTIVITIES
Notes payable		-	-	-	5,280
Repayment of long-term debt		(280)	(335)	(964)	(1,047)
Interest received		629	15	1,753	109
Proceeds from share issuances		50	-	280	578
Purchase of shares in subsidiary		-	-	-	(3,009)
Dividends paid		(2,780)	(2,776)	(8,336)	(8,315)
Financing cash flows of discontinued operations		-	50,604	-	75,082
Cash flows from (used in) financing activities		(2,381)	47,508	(7,267)	68,678

Effect of foreign currency exchange rate changes on cash and cash equivalents		204	(2,422)	429	(68)

Net increase in cash and cash equivalents during the period		122,094	125,555	107,091	87,385
Cash and cash equivalents, beginning of period		192,598	45,491	207,601	83,661
Cash and cash equivalents, end of period		314,692	171,046	314,692	171,046

Cash and cash equivalents attributable to:
Continuing operations		314,692	148,610	314,692	148,610
Discontinued operations		-	22,436	-	22,436
		314,692	171,046	314,692	171,046