Retail Stock Basics: What Are Same-store Sales?
Same-store sales growth is the foundation of retail stocks.
While many people buy and sell stocks based on trading strategies or chart patterns, that isn't investing; it is speculation. As an investor, you are part owner in a business. Therefore, investment decisions should be based on fundamental analysis of your stocks underlying business.
Luckily, the metrics that matter to retail stocks are fairly easy to learn. Even if you've never bought a stock, with a little time and patience, you can learn how to differentiate a good retail stock from a bad one. Today we'll take a look at same-store sales growth, a widely reported statistic for most retail businesses.
Same-store Sales Growth: The Foundation of Retail Stocks
Same-store sales, often referred to as comparable sales or SSS, are the foundation of retail business. This metric tracks sales growth, expressed as a percentage, at existing locations that have been open at least one year. It is measured over a specific comparable time period, typically the year before. For example, if a retailer reported same-store sales growth of 5% in Q4 of 2017, that would mean that existing stores grew revenue by 5% vs. Q4 of 2016.
Same-store sales growth is published by most retailers and restaurants on a monthly or quarterly basis. It is also typically featured in annual or quarterly reports, where same-store sales growth is measured over the previous years period.
How Same-store Sales Differ From Revenue
Same-store sales are typically a more accurate measure of a retailer's success than revenue is. That is because same-store sales growth is typically due to improved operations at existing stores. Revenue growth is sometimes just a product of opening new stores.
If Retailer "X" expands its store base by 25%, its sales (revenue) will increase because it's selling more goods in more stores. But Retailer "X's" existing stores don't have to be doing well for it to open new stores; the new stores may be a terrible idea. In fact, if Retailer "X" opens new stores despite having weak same-store sales, it may have to take on debt to finance its expansion. It could very well be in a worse financial position despite having higher revenue. Same-store sales bring the truth out of a growth story.
Revenue growth without same-store sales growth is the financial version of junk food; it's hollow.
Same-store sales are also an operational tool for management at retail companies. Specifically, it helps retailers manage their store count. Robust same-store sales growth indicates that there is strong customer interest and that expansion is needed. On the other hand, weak same-store sales could be a sign that a retailer has over-saturated a geographic market or is losing popularity. Good management teams confront weak same-store sales head-on, by closing under-performing stores or re-investing in them before it's too late.
Limitations of Same-store Sales
Like all tools, same-store sales has its limitations. First, same-store sales growth can be due to price increases, rather than an uptick in customers. Therefore, always dig into a quarterly report to make sure that a stock has improved its foot traffic along with its same-store sales.
Also, for obvious reasons, same-store sales growth only matters to brick-and-mortar retailers. Retail businesses that operate completely online, like Amazon.com, should be judged by other metrics such as top-line revenue, subscriber base, etc.
Finally, remember that smaller chains typically grow faster than large ones. A chain with 50 locations may pull in customers from 30 miles away, and therefore isn't an apples-to-apples "SSS" growth comparison with Walmart, which has stores in most towns. Walmart's rapid growth days are in the past, which is why it pays a healthy dividend and trades a reasonable valuation.
But same-store sales, even for Walmart, always matter. Everything else, top-line revenue, profits, new locations, tend to follow if same-store sales growth is strong. Retail stores are expensive to build, own, and operate. Healthy same-store sales are what keep expensive retail stores running, and same-store sales growth is a signal that a retail chain can grow.