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Every month, retailers announce their sales and "comps" growth. Comps, which refer to comparisons of same-store sales, can help investors determine how well a company's brand is doing and how efficiently its stores are increasing revenues.
Each month, as the calendar page flips over, you'll hear announcements about things like Gap's
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 2007, it must have been open for the full month of May 2006. If the store opened May 15, 2006, comps couldn't begin to be counted until June 2007, 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, but more and more are announcing them each month as well.)
What factors affect comps? The two main factors are prices and the number of paying customers. Revenues equal price multiplied by 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, some retailers, like Gap, have announced in the past 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 like unusually placed holidays and very bad or very good weather. In defense of retailers, if a big shopping holiday is later in the year than usual, or if March had four shopping weeks this year as opposed to five last year, these things could hurt comps and would be beyond the company's control.
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 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. Either way, sales are increasing without the added costs associated with opening new stores. This shows that marketing is doing well and that the brand is popular with consumers.
Retailers can increase their revenues in two ways: by increasing them at existing stores or by increasing the number of stores. The former approach is certainly less expensive. Some companies, such as Starbucks and Target
What about falling comps? There are a few reasons why a company's comps fall. It could mean the brand is losing strength and people aren't shopping at the 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. But one thing is certain: 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 since that conclusion is an attempt at predicting the future, there's no guarantee that the conclusion will be correct. But there are a few indicators that separate short-term problems from long-term ones. If the most recent negative comps follow 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.
The most important thing to remember about comps is that, just like any other metric or number, they are a part of the picture, not the entire tableau. Just because comps are rising, that doesn't 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 and margins matter, too, as does the overall financial health of the company. You want to consider all of these factors before making your investment.
This article has been updated by Prashant Rathore and Joe Magyer and was originally written by Bob Fredeen. Neither Prashant nor Joe owns shares in any companies mentioned in this article. The Motley Fool has a disclosure policy.