Smaller Stores Report Higher Same-Store Sales Growth than Big Box Retailers

Same-store sales is a commonly used measure of growth in the retail industry. It is a measure that separates new store sales growth from growth at the existing base of stores -- new stores grow at much faster rates than existing stores. This is the second part of a two-part article that compares the same-store sales results of Tuesday Morning (NASDAQ: TUES  ) , Dollar General (NYSE: DG  ) , Dollar Tree (NASDAQ: DLTR  ) , Wal-Mart (NYSE: WMT  ) , Big Lots, Target, and Family Dollar. The first article discusses the companies which had the worst same-store sales performances. This article will discuss what's driving the companies that had the best same-store sales performances.

The calculation
As reviewed in the previous post, most companies use the same basic calculation to determine which stores are included in their same-store sales numbers. It is important to note how the store makes the calculation, however, because slight changes can affect the comparison. Some companies include sales at stores open for over 12 months, while others require a period of at least 13 months. Those companies that require stores to be open for more months before including them will have slightly lower growth rates because new stores grow faster than old stores.

Top 3 companies by same-store sales growth
Dollar Tree barely beat out Family Dollar for the No. 3 spot, with same-store sales growth of 3.1% for the quarter and 2.9% for the last nine months, according to the third quarter 10-Q. With over 4,777 stores in 48 states the company attributes the growth in same store sales to increased customer traffic. The earnings statement also credits the roll-out of frozen and refrigerated merchandise to more stores. "At November 2, 2013 , we had frozen and refrigerated merchandise in approximately 3,110 stores compared to approximately 2,470 stores at October 27, 2012 ," the company said in its last earnings report.

Frozen and refrigerated merchandise are generally consumables, and consumables are one of the fastest-growing segments among small box retailers. Frozen food is a consumable that also helps to bring people back to the store more often. "We believe that this has and will continue to enable us to increase sales and earnings by increasing the number of shopping trips made by our customers," the company said. Incidentally, frozen food is an area of concern at Wal-Mart as sales were softer than expected in the third quarter.

Dollar General, the shining star of the discount retail group, should be the winner of this contest, but it has to settle for the No. 2 spot this quarter because the winner "cheated". According to the company's third quarter 10-Q, same-store sales were up 4.4% in the third quarter, and 4% for the first 9 months of the year. Unlike the company that made it to the No. 1 spot in this contest, Dollar General can also boast positive earnings growth.

Same-store sales for Dollar General includes stores that have been open for at least 13 months. At the end of the third quarter this metric included 10,208 stores which accounted for $12.4 billion in total sales. The company credits increases in customer traffic and average transaction amount for the increase in same store sales. The increase in traffic is attributed to various operating and merchandising initiatives including the expansion of tobacco products and "improved utilization of store square footage."

Tuesday Morning wins "best in show" with, according to the first quarter 10-Q, an astounding 9.1% growth rate for same-store sales. Same-store sales for Tuesday Morning includes stores that have been open for at least 12 months. According to Tuesday Morning, "The increase in comparable store sales for the first quarter of fiscal 2014 was comprised of a 13.4% increase in transactions offset by a 4.3% decrease in average ticket." This is what happens when you have heavy mark-downs.

Last year Tuesday Morning wrote-down 20% of its inventory, which allowed it to lower prices.  So, even though a 9.1% growth rate in same-store sales is incredible, the company had to sacrifice on price in order to get those sales. If you have to sacrifice ticket, earnings will take a dive, which is exactly what happened to Tuesday Morning.

TUES EPS Diluted (TTM) Chart

TUES EPS Diluted (TTM) data by YCharts

The Foolish bottom line
Same store sales is a measure of growth that tells investors how well the company is growing sales without including new store sales. The metric makes it difficult for companies to hide behind sales increases from new stores alone, which grow at a much faster rate than existing stores and therefore tend to be misleading as an indicator of true sales growth.

Tuesday Morning has also shown us that same store sales growth can be misleading as an indicator of future earnings performance. The company had the highest same store sales growth, but only because it was willing to engage in heavy mark-downs at the sacrifice of earnings.

At the end of the day, whether small- or big-box, you want to invest your money with a company that knows how to achieve sales growth without relying on opening new stores or acquisitions -- that's what this metric is all about. Within that logic, and as supported by this analysis, small-box retailers appear to be doing a better job at that than Wal-Mart, Target, and Big Lots. We'll have to wait until the end of February to see if the trend continued into the holiday season.

The biggest big box retailer is going down
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