Foolish Fundamentals: Same-Store Sales

Every month, retailers announce their sales and comps growth. "Comps," which refer to comparable same-store sales, can help investors determine how well a company's brand is doing and how efficiently its stores are increasing revenues.

Each month, as the calendar page flips over, you'll hear announcements about things like Gap's (NYSE: GPS  ) same-store sales dip or Starbucks' (Nasdaq: SBUX  ) same-store sales rise. So what are these all-important numbers, and why do they matter?

Same-store sales, or "comps," measure sales growth at stores that have been open for more than a year. For a store to be able to count monthly comps for May 2006, it must have been open for the full month of May 2005. If the store opened May 15, 2005, comps couldn't begin to be counted until June 2006, a year after the store's first full month of business.

To understand quarterly and annual comps, simply replace "month" with "quarter" or "year" and apply the same concept. (Almost every retailer announces comps each quarter, but more and more are announcing them each month as well.)

What factors affect comps? The two main factors are prices and the number of paying customers. Revenues equal price times the number of sales, right? So all things being equal, if prices go up and volume stays the same, sales will increase. That also holds true if volume increases but prices stay the same.

Notice, however, that when a company has a bad month, it doesn't often attribute the problem to price or volume woes. Companies rarely say things like, "No one came to our stores on the 18th of the month, so comps declined." To their credit, some retailers, like Gap, have announced in the past that comps fell because of deeper discounts, but this kind of announcement is the exception, not the rule.

The usual suspects for falling comps are things like unusually placed holidays and very bad or very good weather. In defense of retailers, if a big shopping holiday is later in the year than usual, or if March had four shopping weeks this year as opposed to five last year, these things could hurt comps and would be beyond the company's control.

Now that we know what comps are and what factors affect them, let's see what these numbers mean for a company. First and foremost, rising comps are good. They indicate that more people are coming to buy things at the stores, or are paying more for the same things they bought a year ago, or some combination of the two. Either way, sales are increasing without the added costs associated with opening new stores. This shows that marketing is doing well and that the brand is popular with consumers.

Retailers can increase their revenues in two ways: by increasing them at existing stores or by increasing the actual number of stores. Obviously, the former approach is less expensive. Some companies, such as Starbucks and Wal-Mart (NYSE: WMT  ) , have done both. Others, such as Gap and Pacific Sunwear (Nasdaq: PSUN  ) , have increased their number of stores, but comps have been weak.

What about falling comps? When a company's comps are falling, it could mean one of a few things. It could mean the brand is losing strength and people aren't shopping at the company's stores. It could mean that the economy is worsening and people aren't interested in shopping anywhere. Or it could mean the company has too many items selling at discount prices. But one thing is certain: Falling comps represent a problem. In such a situation, the question to ask yourself is whether you're looking at a short-term bump in the road or the beginning of a long-term swoon.

This question is very difficult to answer, because you have to look at several factors to come to any sort of conclusion. And since that conclusion is an attempt at predicting the future, there's no guarantee that the conclusion will be correct. But there are a few indications that separate short-term problems from long-term ones. If negative comps are the most recent in a long string of negative comps, for example, that's a bad indication of a long-term problem. How competitors are faring is important, too. When Gap suffered from negative comps in both its most recent quarter and most recent month, so did several other apparel retailers.

Actually, looking at Gap leads us to a final point: Look at what the company said the problem was and what it planned to do about it. Gap has said many times that it had moved away from the core values that made it strong in the first place and was trying to refocus its brands around those values. At the very least, this admission shows that management saw the problem and was trying to fix it. The approach may not always work, but it was at least a sign that the company was moving in the right direction.

The most important thing to remember about comps is that, just like any other metric or number, it is a part of the picture, not the entire tableau. Just because comps are rising, that does not necessarily mean the company is a good investment. And likewise, falling comps do not always mean it's a bad one. The trends that you see, and the reasons for those trends, matter. Sales and margins matter, too, as does the overall financial health of the company. You want to consider all of these factors before making your investment.

Gap, Pacific Sunwear, and Starbucks are Motley Fool Stock Advisor picks. Take the newsletter dedicated to the best of David and Tom Gardner's picks for a 30-day free spin.

Bob Fredeen, Shruti Basavaraj, and Adrian Rush contributed to this article.


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