There's a lot of competition in the retail world, and companies need to make sure their stores are performing well. That's why so many companies rely on same-store sales as a metric for success.
Also known as comparable-store sales, same-store sales is a measure of sales growth and revenue from a company's existing stores. By tracking revenue increases for retail locations that have been open for a year or more, the same-store sales figure allows companies and investors to compare the performance of established stores over time.
How same-store sales work
Same-store sales figures are typically expressed as a percentage of either an increase or decrease in revenue. If, for example, a company reports that its same-store sales for a given accounting period were 10%, it means that revenues increased 10% from the previous period.
Same-store sales figures help put revenue data in perspective. Let's say a company brings in $100 million in revenue during the final quarter of a given year. Without knowing how well that company performed in previous quarters, or during the final quarter of the previous year, that $100 million figure becomes somewhat meaningless. Same-store sales figures therefore give revenue more context. If same-store sales are up from a previous year, it's a sign that a retailer is moving in the right direction.
Significance of same-store sales
Same-store sales figures play a key role in helping companies evaluate how well their existing locations are performing, both independently and in comparison to new locations. Same-store sales also allow companies to identify and measure business trends that can inform critical strategic decisions, such as whether to invest in their current locations versus open new locations. If same-store sales are up, for example, it could mean that a company is better off focusing on its existing locations and worrying less about expansion.
Same-store sales figures are equally important to investors. It's common practice for publicly owned retailers to share same-store sales data with investors so that they can see how well these companies are operating. Seeing a company's same-store sales increase is obviously a good thing, as it usually means that it's doing a good job of customer retention. But if same-store sales decline, it could serve as an indication that customer interest in its products or services is fading, or that a company's new stores are actually taking away business from its existing ones.
An increase in same-store sales usually sparks investor confidence and can help boost a company's stock price. Poor same-store sales, on the other hand, can have the opposite effect. It's important for investors and management alike to keep a close eye on same-store sales figures, as they can serve as a predictor of a retail company's health and future success.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center, in general, or this page, in particular. Your input will help us help the world invest, better! Email us at firstname.lastname@example.org. Thanks -- and Fool on!