If you are an investor in the stocks of retailers or plan to invest in retailers, one number you need to know and understand is same store sales. This article discusses what the same store sales number is and why it matters.
What are Same Store Sales?
Most retailers report two sales numbers, total sales and the year-over-year change in same-store sales. The total sales number is self explanatory. It is sales generated by all stores in operation during a reporting period. As a result, a retailer’s current-year results may include sales from stores that were not open and, therefore, contributed no sales in the same period of the prior year.
In contrast, same store sales include sales only for stores that were open in both reporting periods being compared. As a result, they are not inflated by incremental sales from new stores that opened in the interim period.
Generally, same store sales are not reported for a calendar month but for a retail month consisting of either four or five weeks. Thus, instead of reporting April 2009 retail sales for the 30-day period ended April 30, 2009 versus the same period a year ago, many retailers reported same store sales comparisons for the four-week period ended May 2, 2009 versus the four-week period ended May 3, 2008.
Many retailers, including many discounters, apparel retailers and department stores, report same-store sales monthly, while some retailers only report them quarterly. Monthly same store sales are usually reported on the Thursday following the end of the retail month. For example, most retailers that report same store sales monthly reported their April 2009 numbers on Thursday, May 7.
As an Investor, Why Should You Care About Retail Sales?
There are a couple of reasons that you, as an investor in retail stocks, should care about same store sales.
First, they move stock prices. Rightly or wrongly, the year-over-year change in same-store sales is probably the figure that investors pay the most attention to when evaluating a retailer’s near-term prospects. As a result, a better-than-expected or worse-than-expected number often will move a retail company’s share price.
Second, the year-over-year same store sales comparison is an indicator of the underlying health of a retailer’s business and can provide clues about the retailer’s financial performance. For example, if same-store sales comparisons weaken, a retailer may find itself with excess inventory that has to be marked down, putting pressure on margins and, possibly, setting the stage for disappointing earnings. On the other hand, strengthening same-store sales may position a retailer to sell more goods at full price, helping to sustain or even expand margins and perhaps boosting earnings.
How to Analyze Same Store Sales
A retailer’s same store sales comparisons may seem relatively straight forward. However, here are a few things to keep in mind when evaluating them.
First, even if a retailer reports same store sales monthly, figures for a longer period such as a quarter can be more indicative of sustainable trends, since monthly sales may be affected by short-term factors such as weather and changes in holiday schedules (for example, Easter is in March some years and April others).
Second, check the prior-year’s results to be sure they were not out-of-line for some reason, because an overly easy or difficult comparison can affect the current-year’s reported numbers. For example, if weather depressed a retailer’s prior-year same store sales, this year’s comparison could benefit from the easy comparison and come in stronger than otherwise. In turn, this could suggest that the retailer’s underlying business is stronger than it really is, creating the possibility of disappointment if the next sales report returns to normal.
Third, expect younger, fast-growing retailers to have stronger same store sales growth than more established retailers. It is generally more difficult for mature retailers that are not opening a lot of new stores to grow same store sales rapidly than it is for a young retailer that is expanding rapidly. Sales for new retail stores often grow very fast in the first few years as the stores build a customer base. Therefore, same store sales for a retailer that is opening a large number of new stores relative to the total number of stores it has in operation should benefit as these still-immature stores begin to be included in the same store sales calculation.