Sales per square foot is one of the most important metrics for brick-and-mortar retailers. It is expensive to build or rent stores and to maintain and staff them appropriately. As a result, retailers that manage to generate more sales from each square foot of space tend to deliver better financial results.
When sales cratered at J.C. Penney (NYSE:JCP) a few years ago, sales per square foot tumbled as well. While the company did close some stores, that didn't come close to offsetting its sales decline. However, sales per square foot is starting to bounce back -- and that could drive strong profit growth over the next few years.
Behind the numbers
Sales per square foot is closely related to another key retail metric: comparable store sales. The comparable store sales (comp sales) metric reports the increase or decrease in a retailer's sales, excluding stores that were opened or closed within the last year.
Comparable store sales increases usually lead to higher sales per square foot, since the comp sales metric excludes changes in square footage from opening and closing stores. During 2014 and 2015, J.C. Penney increased comp store sales by 4.4% and 4.5%, respectively. Sure enough, sales per square foot also increased at a mid-single digit rate.
One advantage of sales per square foot over comp sales is that it enables comparisons between different retailers as well as comparisons over a long period of time at a single retailer. By contrast, comp sales is only really meaningful as a measure of a retailer's current year-over-year sales trend.
J.C. Penney's recent sales gains lifted sales per net selling square foot to $165 in fiscal 2015, up from $147 two years earlier. That's the best result since fiscal 2011. However, it's still 22% below the $212 in sales per net selling square foot that J.C. Penney generated in fiscal 2011.
Room for improvement
The gap between J.C. Penney's current sales per square foot and its 2011 performance indicates that it has plenty of room for improvement. That's also clear from comparing its results to those of fellow mid-price department store Kohl's (NYSE:KSS).
For 2015, Kohl's produced net sales per selling square foot of $228. Over the past five years, this metric has remained in a tight range between $226 and $232.
The difference in sales per square foot was the most important reason why Kohl's posted an 8.1% operating margin last year, compared to -0.7% at J.C. Penney. Gross margin was roughly equal at the two chains, but Kohl's was able to spread its operating expenses over more sales.
J.C. Penney may never be able to match Kohl's in terms of sales per square foot. Even in 2011, Kohl's was about 10% ahead on that metric. However, J.C. Penney should be able to narrow the gap over time.
Here's what J.C. Penney is doing
J.C. Penney is working on several initiatives this year to keep sales per square foot rising. One potentially significant opportunity is the reintroduction of appliance sales. Last month, J.C. Penney began testing appliance sales at 22 stores in three metro areas.
J.C. Penney removed some of the least productive space in the home section to make room for the new appliance showrooms. This move should improve sales per square foot for those stores. If the pilot is successful, J.C. Penney could roll out appliance sales nationwide, which could have a significant positive impact on the company's sales per square foot.
J.C. Penney is also using its Sephora boutiques to drive sales per square foot higher. Last year, the Sephora boutiques posted bigger sales gains than any other category. J.C. Penney is rolling out 60 new Sephora shops this year while remodeling the nearby "center core" area in about a third of its stores to entice customers to venture beyond the Sephora boutiques when they visit.
Finally, J.C. Penney is upgrading the hair salons it operates in most of its stores. Hair salons drive traffic to J.C. Penney stores, and sometimes those customers will stay to shop the rest of the store.
J.C. Penney still faces significant hurdles as it tries to continue its comeback, as apparel demand has been sluggish recently. However, it has some straightforward opportunities to continue driving sales per square foot back toward historical levels. If it succeeds, profitability should improve dramatically.
Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.