Limited Brands (NYSE: LTD ) announced excellent same-store sales growth in June, beating out not only expectations but most of the competition. The 7% growth was in line with the company's overall 2012 performance, and it signals a continued strong year ahead for the clothing retailer.
Why do we care about same-store sales?
Same-store sales growth is an important measure for retailers and investors. It calculates sales growth from stores that have been open for at least year. This helps investors understand if the underlying business is getting better on its own merits instead of simply by building more and more stores.
For example, big-box electronics retailer hhgregg (NYSE: HGG ) reported overall sales growth of 21% in its last annual report -- excellent! However, the stock has fallen 19% this year. What gives? Well that's where same-store sales come into play. If we look a little closer at hhgregg's filing, we'll see that it increased its store count by 20% last year. Same-store sales actually dropped by 1%.
This tells investors that the company is performing poorly, and that the only way it's growing is by opening new stores, which will then also perform poorly. That business model isn't sustainable and even for fast-growing brands it can be painful (think of how Starbucks stalled out).
So looking back at Limited, in June we see that it grew same-store sales by 7% overall. Each brand within the company (which includes Bath & Body Works and Canadian favorite La Senza) also performed well, with Victoria's Secret leading the pack at 11% growth compared to last year. The 7% growth looks even better when it's compared to the Wall Street estimate of 2.4%, which explains why shares jumped over 6% by midday after the announcement.
Other retailers didn't paint such a rosy picture. Same-store sales dropped at The Buckle, Kohls, and Walgreen (NYSE: WAG ) . Walgreen in particular was hard-hit, with sales falling 10%. Much of the decline was due to Walgreen no longer working with Express Scripts. Same-store prescription sales dropped 12% in June.
Limited keeps on winning
Same-store sales can make or break a company, but they're not the be-all and end-all when it comes to investing. Limited has all sorts of positive factors keeping it chugging along. Its brands have strong consumer appeal, and the company is also turning to online sales in order to help its bottom line. Direct-to-customer sales grew 11% in June, which should be reflected in a better profit margin at the end of the quarter. By selling directly to customers, Limited cuts out the cost of in-store sales including cashiers and rent.
As a final point in its favor -- and another reason to expect strong margins -- the company is trimming the fat in Canada. La Senza sales have been strong but not as strong as the company would like. To support more direct-to-customer sales growth, and to cut costs, Limited has started to shut down less-profitable La Senza locations. In 2012, it has already closed 32 of the worst offenders, and freed that capital up to invest in better stores and stronger locations.
The bottom line
Limited continues to be one of the strongest players in the retail apparel world. These June numbers only highlight the value of staying focused and of cutting back when cuts need to be made. I expect the company, and the stock, to continue this strong performance throughout 2012. Keep an eye on same-store sales and remember to examine whether excessive growth is padding revenue results. Retail is a great place to invest, but you have to know the territory.