TORONTO -- Indigo Books & Music Inc. (TSX:IDG) says declining sales of both books and e-readers took a toll on revenue during the most recent quarter, which included the holiday sales period.

The consumer shift to digital reading and the lack of any hit books on offer was offset somewhat by the continuing growth of its gift, lifestyle and toy business, the Toronto-based retailer said.

On a comparable store basis, Indigo and Chapters superstores saw a five per cent decrease in revenue, while its Coles and IndigoSpirit small format stores were down 5.2 per cent.

Online sales, however, increased 3.6 per cent year over year.

Despite the drop in revenue, gross profit was up slightly due to the shift to "higher margin gift and lifestyle products, lower sales discounts, fewer markdowns, and shipping more products through the Company's distribution centres," it 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," CEO Heather Reisman said in a release.

"We've made great strides during the quarter to accelerate our transformation while reinforcing our position as Canada's preferred destination for gift giving."

Indigo posted net earnings from continuing operations of $22 million, or 86 cents per diluted share, compared to $23.7 million, or 93 cents per diluted share in the year earlier period.

Revenue for the quarter ended Dec. 29 was $335.6 million, down from $353 million year over year.

When losses from discontinued operations are figured into the third quarter of 2011, Indigo says it posted a $7.6-million gain in net earnings for the most recent quarter, up from $14.4 million, or 56 cents per diluted share in the year earlier period.

Indigo credits the increase to the elimination of losses from discounted operations -- it sold its e-reader maker Kobo Inc. last year -- partially offset by investments in the business.

Shares in Indigo, which reported after markets closed, were up five cents to $10.85 on the Toronto Stock Exchange on Tuesday.