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Every month, retailers announce their sales and comps growth. "Comps," which refer to comparable same-store sales, can help investors gauge the strength of a company's brand.
Each month, as the calendar page flips over, you'll hear announcements about things like Gap's (NYSE: GPS ) same-store sales drop or Starbucks' (Nasdaq: SBUX ) same-store sales increase. 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, it couldn't count comps 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, and more and more are announcing them each month as well. But as Alyce Lomax pointed out, that may be changing.)
What factors affect comps? The two main ones are prices and volumes, which are affected by the number of paying customers as well as the number of transactions from those 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, in the past some retailers like Gap have announced 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 beyond the company's control, like unusually placed holidays and very bad or very good weather. If a big shopping holiday is later in the year than usual, or if March included four shopping weeks this year as opposed to five last year, those could hurt comps.
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 usually 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. This tends to show that marketing is doing well and that the brand is popular with consumers. However, Sears Holdings (Nasdaq: SHLD ) Chairman Eddie Lampert poignantly reminded us, in his 2005 letter to shareholders, that it's also import to know how well capital is being used to increase same-store sales.
Retailers can increase their revenues in two ways: by increasing them at existing stores or by increasing the number of stores. (In that letter, Lampert also reminded us that these two things are somewhat intertwined.) 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? 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. Most often, 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 because 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, margins, and returns on invested capital 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. Inside Value has also recommended Gap, as well as Wal-Mart.
Bob Fredeen, Shruti Basavaraj, Adrian Rush, and David Meier contributed to this article. Adrian owns shares of Starbucks. The Fool has a disclosure policy.