Would you agree that when it comes to investing information, less is more? Me neither. But some retailers may disagree; an increasing number of companies are limiting the information they provide to investors. Could disclosure of same-store sales data, an important metric in retail investing, soon become a thing of the past?
Some retailers have been reducing how often they report same-store sales figures, also known as "comps." Most retailers report comps on a monthly basis . at least for now.
Rumble in the clearance aisle
The fact that Wal-Mart (NYSE: WMT ) and Target (NYSE: TGT ) decided to report same-store sales monthly instead of weekly hardly seems like a reason to panic. But roughly a month ago, Talbots (NYSE: TLB ) said it was responding to a "growing industry practice" by not breaking out same-store sales for its J. Jill and Talbots brands, and by reporting comps quarterly rather than monthly. Then, in a controversial move, Home Depot (NYSE: HD ) said it would no longer report the metric at all.
A Wall Street Journal commentary from early June mentioned several other companies making similar decisions, including Bombay Co. (NYSE: BBA ) . Urban Outfitters (Nasdaq: URBN ) has long been reporting same-store sales quarterly (although, as a shareholder, I've often wished that it reported monthly, like most of its peers).
Urban Outfitters put its same-store sales policy in place years ago, and anyone following the company knows that it's given long-term investors few reasons to grouse, given its impressive performance. Urban Outfitters may be stumbling in the near term -- its price is down 42% this year -- but over the past five years, its stock has appreciated 868%.
Conversely, Bombay Co. has been struggling for ages (its stock is down 58% in the last year and 20% over the last five years). Talbots hasn't had an easy time of it, either, and it's well known that J. Jill, which Talbots recently acquired, also needs rejuvenation. (Talbots' stock price is down 40% in the last 12 months, and 53% over five years.)
Home Depot's timing for discontinuing same-store sales data couldn't have been worse. With the housing market showing signs of slowing, many people are concerned that the company can't keep up its heady growth. Home Depot's decision might be interpreted as an excuse to avoid inevitable negative sentiment.
Given some of the companies in question, and the challenges they've faced, I'm not sure I see a good argument for the "less is more" scenario.
More than meets the eye
To be fair, companies have a perfectly legitimate concern about the same-store sales metric. A representative of the National Retail Federation told me that analysts and investors have put way too much emphasis on comps, neglecting other important elements. According to the representative, this causes a lot of monthly volatility for retail stocks when same-store sales are released.
Meanwhile, Eddie Lampert, who's well-known for trying to turn around Kmart parent Sears Holdings Corp. (Nasdaq: SHLD ) , took a hard-line approach to same-store sales in his most recent shareholder letter in March. Although he admitted that it is "an important metric for retail performance," he also called it "vastly overrated," with "significant limitations."
First, he pointed out that companies are constantly opening, closing, and remodeling stores, none of which is clear in same-store sales figures. After all, if a company pours $500,000 into remodeling an existing store, and those improvements only result in $10,000 in additional profit, it wasn't a good use of cash.
Second, he pointed out that most stores don't mature for four years. In that respect, companies aggressively opening new stores might have far better same-store sales numbers than companies with a large base of mature stores. (In some cases, like Sears and Kmart, those companies might be shuttering underperforming stores.) Lampert contends that same-store sales figures might mask the problem of aggressive companies opening stores that make little long-term economic sense.
More information, not less
Would it help if companies broke out metrics like return on invested capital (ROIC), so that investors could better determine whether money is being spent sensibly? Absolutely -- but that would fall into the "more is more" category. As cynical as it sounds, companies don't have to release those numbers, so chances are they won't.
Note, however, that Whole Foods Market (Nasdaq: WFMI ) has emphasized its disclosure of the Economic Value Add (EVA) metric on a quarterly basis; ROIC is part of an EVA analysis, concentrating on long-term shareholder value creation rather than short-term earnings numbers. Investors should applaud such a shareholder-friendly move, because it complements the same-store sales metric by measuring profitable growth, rather than growth at any cost.
At any rate, retailers aren't required to release monthly same-store sales data, either, which is why I'm concerned that the recent moves by Home Depot, Talbots and the rest might lead to a domino effect -- "If my competitor doesn't do it, why should I?" -- doing investors no favors in the process.
Ringing up the results
True, retail stocks often get extremely volatile when same-store sales data is released. While it's a great metric to help assess the performance of company and its brand, any good Fool knows that one month's worth of data does not a long-term decision make. I've written before about irrational moves stocks have made on that red-letter Thursday every month, as have many of my colleagues. (Check out Wall Street's Retail Idiocy for just one example.) If you're not keyed into the historical picture -- or, heaven forbid, only looking at one metric -- you're a trader and a speculator, not a long-term investor.
While I understand that monthly same-store sales data can sometimes add up to short-term thinking (if not occasional hysteria), I have to take a stand for transparency. Ditching the metric, instead of opting for investor education, seems like throwing the baby out with the bath water.
As investors, we have our own responsibilities. Take monthly same-store sales fluctuations with a grain of salt. Resist the hype when you're trying to find true quality retailers with sustainable competitive advantages. Do your due diligence on free cash flow, profitability, debt, revenue, margins, and inventories. Remember that same-store sales are short-term, not the be-all and end-all.
Retail, with its rollercoaster of fashion (and sometimes fads), is a tough industry for investors. We need all the information we can get to make it an attractive place to put our money. Let's hope that "less is more" won't become a more common sentiment. Maybe, just maybe, some of the most shareholder-friendly companies will realize that their investors deserve more than that.
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