The Fool FAQ

Same Store Sales

The Fool FAQ

I'm lost in a sea of investment terminology. Will some Fool please tell me what the devil same store sales are and why they're so eagerly awaited?

Same store sales are a measure of how well a particular retail chain is doing revenue-wise versus the prior year. Also called comparable store sales (or simply abbreviated comp. store sales), they measure the percentage change in revenues for stores that have been open more than one year.

Same store sales numbers are reported voluntarily by retail companies, which explains why all retail stores do not release them. The numbers are interpreted relative to the results of a company's competition as well as in relation to the general trend for that specific corporation. The numbers are often viewed as a sign of the company's general health, although some view this claim as specious since revenues can be pumped up by sales during the month. Marked-down goods increase sales numbers but do not increase profits.

An example: XYZ Corp. had 30 stores open last year that had $50 million for the month of March. This year, XYZ Corp. has 32 stores with total sales of $55 million for the same month. The two new stores each had $1.0 million in sales, meaning that the 30 stores open for more than one year had sales increase to $53 million ($55 million minus $2 million for the two new stores.

Same stores sales are: $53 million/$50 million = 1.06 = +6.0%. Same-store sales numbers are probably the most overused and confusing indicator of equity value out there. Same-store sales focus on increases in revenues at stores that have been open for one year or more, comparing the revenues from the current period with the same period last year. Fluctuations in same-store sales numbers for a month will often cause stocks to move appreciably when the underlying picture has not really changed at all.

Case in point: it was a disappointing July Same-Store Sales (SSS) report that initially knocked furniture retailer Heileg Meyers off of its growth-stock perch in early August 1995, with the stock trading as low as $20 7/8 after reporting a 0.9% *decrease* in that old SSS number. Numbers for the five months ending with July did not look much better, with same-store sales only up 1.9% for the entire period. Bear Stearns cut its rating on the stock from "attractive" to "neutral" and the company stayed in a $22-23 range for the remainder of the month.

Cut to September: Heileg Meyers reports a 8.5% increase in SSS for the month of August, pushing the stock up $2 1/8 to $24 today. Now, this ain't the $25-$26 range where the company sat before the disappointing July numbers, but it is a far sight better than the $21 in early August. Now, why are we saying that this supposed "change" is a bit illusory?

First, you have to understand that Heileg Meyers has pretty close to a unique franchise in the furniture business. Heilig Meyers Company, a Virginia corporation, operated 689 stores in 26 states and Puerto Rico as of August 31, 1995. They set up shop in small towns where they are the dominant store, much like the Wal-Mart model. The crucial difference is that they actually function as a glorified credit company, offering their furniture on generous terms and profiting from interest charges as much as furniture sales. Average account balances for thjeir credit customers, less a certain allowance for bad debt, are actually better indicators for the future performance of Heileg Meyers than same-store sales.

Second, in this circumstance, total sales increases are just as important as same-store sales increases. Heileg Meyers comes into communities, buys out the local furniture store, and sets up a credit-oriented store. Although same-store sales only increased 1.9% for the five months ending in July, total sales were up 15.2%, most of which was on credit from which the company would receive interest income. Even those "disappointing" July numbers showed a 19.8% increase in total sales, numbers which actually should have created some excitement, or at least mitigated somewhat the baleful same store sales number.

Even the supposedly "great" August results of an 8.5% increase only moved same-store sales for the trailing six months to a 2.8% increase, not that bad considering the terrible retail environment, but not that much more than the 1.9% for the five months ending with July. The total-sales numbers for August are outstanding, though, with a 27.4% increase for the month and a 20.0% increase for the six months ending with August.

Only one problem. . . how much of that was really from sales? This is the real problem with same-store sales numbers; if a company runs many promotions in a month to boost the numbers, offering discounts, for example, or no finance charges for a year, then the revenues don't translate into the all-important numbers everyone wants to see---EARNINGS! Ironically, if you were looking in depth at same-store sales numbers for Heileg Meyers, you would probably have bought the stock in August and thought about selling in September. This move would be based on the results which had Wall Street doing EXACTLY the opposite.

This is not just a furniture store phenomenon, either. Best Buy danced the same jig in recent months based on same-store sales. The increase in August sales numbers, in conjunction with a promotion where the company gave away free monitors with computer purchases, will not really translate into earnings unless Best Buy gave away really cheap monitors.

Same-store sales. . . gotta watch them carefully.