Same Store Sales: This Retail Metric Is Less Reliable Than You Think

Same-store sales are a favorite technique for sizing up retail and restaurant stock, but there are problems with overrelying on it.

Jeremy Bowman
Jeremy Bowman
Aug 17, 2015 at 6:00PM
Consumer Goods

Same-store sales may be the most tracked figure of retail and restaurant stocks, but there are reasons to be wary of the metric.

Perhaps more than any other statistic, the financial media relies on same-store sales to explain large stock movements following earnings releases, and the metric is held up as one of the most important, if not the most important figure for assessing retail stock.

While same-store sales provides useful snapshot of a company's short-term performance and an indication of where it's headed, it's a mistake to rely too heavily on comparable sales, especially when looked at outside of context. Here are a number of reasons why:

1. Inconsistency
For most companies, same-store sales are incredibly inconsistent, rising one quarter then falling the next before improving once again. In many cases, these fluctuations are simply noise and distract from the underlying performance of the company. Let's take a look at Chipotle Mexican Grill (NYSE:CMG) as an example. The table below shows Chipotle's comps for the last 11 quarters.

 Quarter  Same Store Sales
Q4 2012   3.8%
Q1 2013  1%
Q2 2013  5.5%
Q3 2013  6.2%
Q4 2013  9.3% 
Q1 2014  13.4%
Q2 2014  17.3%
Q3 2014  19.8%
Q4 2014  16.1%
Q1 2015  10.4%
Q2 2015  4.3%

Source: Chipotle earnings reports

As you can see from the table, there's been an ebb and flow to comparable sales as they fell through 2012 and hit bottom at 1% in Q1 2013 before rising all the way to 19.8% in Q3 2014 and then falling again. That's a huge range. What accounts for the monster gains between Q1 2013 and Q3 2014? Not much, really.

Yes, Chipotle raised prices in 2014, but most of the increase in organic sales was due to higher traffic. There were no changes in management or strategy during that period that caused the growth; it just seems to be the nature of the business. CFO Jack Hartung noted that comps at the burrito chain tend to travel in three-year cycle, as 2011 was a boom year as well. The question for investors, then, is how to evaluate such a stock based on comparable sales.

Chipotle was essentially the same company in Q1 2013 as Q3 2014 and now. In the fall of 2012 the stock fell below $250 on concerns about declining comps, but since then the stock has tripled. Of course, there was no way to know comparable sales would bounce back so strongly, but the fundamentals of the business, profit margins, demand, and new store openings remained solid, indicating the underlying business was just as strong.

The biggest problem with using comparable is that it's highly likely that they'll be much different a year from now.

2. Manipulation
Same-store sales are also problematic because they are easy for businesses to manipulate. Some companies include online sales in comparable sales, which can artificially boost comps. Lululelmon athletica (NASDAQ:LULU) provide figures on total comparable sales, which includes e-commerce, and comparable store sales, which does not.

The discrepancy may be helpful or just confusing. Other times, same-store sales can jump due to markdowns or price increases, which may not help the underlying businesses. Selling discounted merchandise will lower profit margins, while an unwarranted price increase could cost customer loyalty over the long term even if it provides an immediate bump in sales. Focusing on comparable traffic instead of sales, which strips out pricing changes, can give a more accurate picture of performance.

3. Randomness
As the fluctuations in Chipotle's comparable sales indicate, there are a number of factors that are out of the company's control that may cause the figure to move up or down. Weather, for instance, which is often cited during weak quarters, will keep shoppers home; the economy is another factor, as are competitors' short-term promotions or positive press. All of the above will have an effect on quarterly comps, but are not important factors in a company's long-term performance.

4. Relativity
Finally, comparable sales cannot be looked it in a bubble. In their second quarters, Macy's (NYSE:M) reported a same-store sales decline of 2.1% while J.C. Penney's (NYSE:JCP) rose 4.1%. Using that statistic alone, one would conclude that Penney's is the stronger business, but that is far from the case. J.C Penney's is in the midst of turnaround after disastrous mismanagement, and is still putting up losses in the hundreds of millions of dollars each quarter. Macy's, meanwhile, is one of the best-performing department-store chains, and its stock has jumped several times since the recession.

Similarly, comparable sales need to be measured relative to the year before, as high growth one year can lead to slow growth the next. Looking at two-year comps instead of one-year can be a helpful remedy to this.

While same-store sales will remain important, it's important for investors to consider other factors when evaluating restaurant and retail stocks, such as profit margin, expansion opportunities, average unit sales, average sales per square foot and others. Comparable sales is just one of many clues to use to find the next multi-bagger stock.