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Fool On The Hill

Wednesday, November 18, 1998

An Investment Opinion
by Louis Corrigan

Same-Store Sales

At first glance, children's apparel retailer Gymboree (Nasdaq: GYMB) appeared to have a blowout last June. Revenues for the month rose 97% versus June 1997 while same-store sales shot up 65%. Clearly, this retailer had resolved the troubles that had sliced its stock in half. The turnaround was in full swing, right?

Nope. In fact, since the June numbers were announced, the stock has lost another 50% of its value as the descent that started last December has continued. What gives? For starters, consider these numbers:

Month   Same-Store Sales   Total Sales
June 65% 97%
July -31% -13%
August 4% 24%
September -18% 1%
October -7% 7%

While store expansion has kept overall revenue rising every month this year except July, same-store sales have been choppy and largely negative of late. June's astonishing gain was a complete anomaly. In fact, any investor following the company would have recognized that the June results were actually a sign of how bad Gymboree's business was and that the retailer was only beginning to confront its problems with real gusto.

Investors must always determine the most useful metrics for tracking a company's progress. For most retailers, "same-store sales" (SSS) is one of the basic tools. Also called "comparable store sales" or simply "comps," this metric typically compares sales at stores open for at least a year. In the above example, the metric offered an apples to apples comparison between revenue generated by the Gymboree stores open in June 1997 and the same stores a year later, backing out some stores that had been expanded significantly in the meantime.

Many retailers voluntarily release such comp store information on a monthly basis. Wal-Mart (NYSE: WMT) and a few others even offer weekly updates. These SSS numbers provide investors a frequent snapshot of the business, and by extension, the health of a particular sector. The Fool publishes the monthly "Retail Sales" figures. Click here for the latest update.

Comp store sales matter because they can say a lot about a company's appeal to consumers. That's because a good business should see sales gradually increase over time as its stores mature and the communities it serves become more dependent on it.

If you run a burger joint, for example, you would like to see happy customers coming by for lunch more often and maybe bringing their friends along, too. You would also like to add new products, say curly French fries or milkshakes, to get current customers to buy more on each visit. It's even better if you've got such great food that you can convince customers to pay a little more each year for the same stuff. The same-store sales metric alone doesn't capture which of these components is increasing store-level sales, but it suggests one or all of these factors are at work.

Sure, outside of just raising prices, boosting store-level revenue involves some incremental costs. You may need to add more teenagers to flip burgers, bring in some French fry machines, or beef up supplies. But you're really working with some fairly fixed costs for basics like rent, management talent, getting the supplies delivered, and so on. If you can generate more sales off the expenses you're already committed to paying, then, other things being equal, you've boosted your profit margins.

Retail chains, of course, can grow overall revenue by opening new stores. Every growing retailer depends on such expansion to increase not just profits but profitability. That's because a large retailer usually can negotiate better deals from distributors, or it can source products direct from manufacturers and employ its own distribution facilities. These economies of scale can boost gross profit margins or at least position a retailer to remain competitive on price. The company can also boost overall operating margins by leveraging other relatively fixed costs such as marketing or administrative expenses over a larger revenue base.

Still, selling more stuff at existing stores is a key driver of profits, and that's why same-store sales spark such interest. They simply offer a good, simple means for projecting a retailer's short-term performance. However, investors also need to recognize the limitations of the metric.

In short, context matters. Numerous temporary factors can affect same-store sales in a given month, including unusual weather, the timing of a holiday like Thanksgiving, unusual strength during the year-ago period, or other matters that may sound like excuses but could be perfectly legit and nothing to worry about. The comp-store trend is usually far more important that any single month.

For example, American Eagle Outfitters (Nasdaq: AEOS), a retailer of basic apparel for the college crowd, turned in just a 1.9% same-store sales gain last January. One might say this was in spite of double-digit SSS increases in November and December, yet the January dip was actually a direct result of selling so many products during the core holiday season. American Eagle just didn't have much left come clearance time. The weak January, then, actually confirmed how great business was for this highflying retailer, which went on to deliver comp-store growth in the 40%-plus range over the ensuing four months.

Conversely, a choppy same-store sales trend can point to serious problems with a company's merchandise mix or overall competitive position. Spikes in same-store sales after several down months may point to huge price cuts or special promotions to clear out inventory. That's the story behind Gymboree's ostensibly terrific June sales.

When the stock hit its 52-week high last December, same-store sales for the first nine months of FY97 had inched up just 1% even as inventories rose much faster than overall sales and gross margins were deteriorating. The picture kept getting worse as same-store sales fell 15% in January and 2% in February before bouncing up 6% in March and then falling 2% in April. By the end of April, inventories were up 104% year-over-year despite overall sales growth of just 21%.

By June, the company finally threw in the one-sies and slashed prices. Though overall sales shot up 39.2% in Q2, gross margins plunged to 33.4% from 42.5%, and Gymboree reported a loss of $0.03 per share versus a gain of $0.19 in Q2 1997. In this case, the same-store sales trend alone would have suggested the retailer was having trouble, but the financial statements considerably fleshed out the story.

Trends, though, come and go, even at the best companies. Recipes go stale, this year's fashion is next year's joke. Last year's highflyer may run into turbulence when it comes up against one or even two years of huge same-store sales gains. Alternatively, turnaround stories can take hold after a retailer faced with serious problems and a year or more of declining same-store sales spruces up its merchandise or image. This year's modest recovery can translate into terrific comp-store sales gains that should attract investors' attention.

Surely, American Eagle continues to soar for good reason while Gymboree continues to tumble for equally good reason. But the same-store sales figures are one of the easiest ways for investors to monitor the changing fortunes in the retail sector.

For more, see Same Store Sales in the Fool FAQ area.

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