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* Q3 EPS C$1.19 versus C$1.38 a year earlier
* Revenue rises 14 percent, beats expectations
* Digital initiatives squeeze profits, but boost revenue
* Board OKs quarterly dividend of C$0.11/shr (Adds details)
TORONTO, Feb 8 (Reuters) - Indigo Books & Music Inc IDG.TO reported a lower quarterly profit on Tuesday, squeezed by heavy investment in its digital business, a sector that it said drove revenue growth.
Indigo, the biggest book retailer in Canada, operates about 250 stores, including close to 100 superstores under the banners Indigo, Chapters and the World's Biggest Bookstore.
The company has invested heavily in digital and online initiatives, tapping into the trend of reading books on smartphones, tablets or notebooks. Sales from its website, chapters.indigo.ca, were up 6.5 percent.
E-reading service Kobo, an Indigo spinoff, comes pre-installed on devices such as Samsung's (005930.KS) Galaxy Tab. It will also be on Research In Motion's RIM.TO PlayBook, when that tablet is released later this year.
Kobo e-readers were among the best-selling items at its stores during the holiday season, the company said. Indigo sells its Kobo e-readers through its Canadian stores as well as U.S. retailers Borders BGP.N and Wal-Mart Stores (WMT.N).
For its third quarter, ended Jan. 1, the company reported earnings of C$30.2 million ($30.5 million), or C$1.19 a share, compared with C$34.5 million, or C$1.38 a share, a year earlier.
Revenue rose 14 percent to C$387.6 million.
Analysts, on average, had forecast earnings of C$1.29 a share on revenue of $366.9 million.
The board also approved a quarterly dividend of 11 cents a common share.
The Toronto-based company's stock has gained 4 percent since the start of the year.
$1=$0.99 Canadian Reporting by S. John Tilak; editing by Peter Galloway email@example.com; +1 416 687 7918