I spent an hour at the gym this morning, but the workout was lacking. Instead, a representative pitched me on getting a personal trainer at the low price of a couple hundred dollars a month -- the gym costs $10. While it's a slightly more exaggerated version of the standard, this is a classic upselling scenario. I'm in for $10, but the company can increase its sales by getting me to buy some other product.
For bigger businesses, this sort of upselling feeds into the company's sales per square foot and average ticket price. Similar to comparable-store sales, these measures help us understand how productive stores are. For investors, they help give an insight into how effectively a business is growing its sales, regardless of how may new locations it adds.
The revenue lie
A company that wants to make more money can almost always do so -- though there are obviously exceptions -- by just building more stores. If a lemonade stand is making $5 a day, opening another across town will probably get you up toward $10 a day. That's great, if the lemonade company is managing its costs correctly and if both businesses are growing.
Now suppose that those things aren't both true. For instance, over the course of its fiscal 2012, hhgregg (NYSE:HGG) increased its overall revenue by 20% -- huzzah. Over the same period, comparable-store sales fell 1.1%. So where did all the revenue growth come from? A large part of the growth came from the company's expanded footprint. Over the same period, hhgregg added 35 stores -- a 20% increase.
While the bottom line is, well, the bottom line, looking closer to the top gives investors important information about the strength of a company's brand and operations. Same-store sales growth tells us something about how popular a business is, but it doesn't tell us anything about how efficient a business is.
Average ticket price
Not too long ago, a commenter mentioned that she felt like Starbucks (NASDAQ:SBUX) was pushing the upsell too hard at locations near her. She was put off by the sales push and was wondering if that had any impact on the company. The answer is a resounding yes -- but the impact is positive.
Starbuck's first-quarter results came with a 5% rise in comparable-store sales, with 1 percentage point coming from an increase in the brand's average ticket. That's a result of pushing bigger sizes, extra food, and more retail products at the point of sale. As the company gets more and more immersed in the sale of food, expect the pressure -- vocalized or simply from the atmosphere in-store -- to increase.
Starbucks is hoping that its recent acquisitions of La Boulange bakery and Teavana will help boost its sales as well. Bakery items are an easy add-on for baristas and can help the business into the lucrative lunchtime market that it desperately wants to get a piece of. Teavana's packaged tea is another easy ticket booster, and its new tea bars are set up to give customers a taste of teas that they can then take home. More upselling is on the way.
Sales per square foot
Another measure that investors and businesses can use to compare performance is sales per square foot. This is a good indicator of how efficient a business is, and it can help predict the financial impact of opening new locations. While the difference between an electronics retailer and a discount store can be interesting, the most telling comparisons come from direct competitors.
Look at the difference between Lucky Brand stores and The Buckle (NYSE:BKE). Lucky is currently churning out $645 per square foot in its stores while Buckle is only managing $475. That tells us two things. First, Buckle is behind the curve on its sales, and it's failing to take advantage of the space that it's using. Both brands sell jeans around the same price points, so Lucky is doing something right that Buckle isn't. Second, it tells us that Buckle has some potential to grow. Lucky is a solid brand, but it's not magic. If it can break the $600 mark, then Buckle can, too, with some work.
Getting more from each visit
By looking past simple revenue metrics, we can see that there are all sorts of ways to measure how successful a retailer is at converting its foot traffic into cash. By upselling, businesses can get incremental gains on each sale, bumping their overall revenue up and making the most out of slow periods. By looking at sales per square foot, we can compare businesses and figure out which ones are ahead and which have room to grow. Both measures give investors the tools they need to see deeper into potential investments.
Build up your investing toolkit
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.
Andrew Marder owns shares of The Buckle. The Motley Fool recommends and owns shares of Starbucks and The Buckle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.