Some of the hot stocks this past year have been McDonald’s and Wal-mart. Both seemed to buck the trend when everyone else was losing money. Generally speaking revenue is an important figure when performing an analysis on a company like Wal-mart or McDonald’s. However when dealing with retailers there is an equally important figure that gives the revenue figure some perspective, same store sales.
What are same store sales?
Same store sales is a look at the sales of stores opened for a year or more.
Why is the same store sales figure important?
Revenue growth is an indication that a company is increasing its market share and growing. However looking at revenue alone can be misleading as an indication of growth. Companies can increase revenue by expanding and opening more retail shops. This sort of expansion is good but unsustainable and also more expensive. Healthy companies should also be showing revenue growth in existing stores. This is where same store sales figures come in. It removes any new stores and looks to compare the revenue from the previous year with the same amount of stores in the current year.
An example
In 2009 Widgets Co. had 10 outlets and revenue of $100 million. Now in 2010 they’ve expanded to 20 stores and increased revenue to $200 million. It’s great that revenue has doubled but so has the amount of stores. However if you don’t weed out the new stores from the revenue stream (which is what same store sales does) technically speaking sales per store would remain flat at $10 million per store. It’s conceivable that Widgets Co. could continue to expand to the point where they have a retail shop on every block in north America. If this were the case then the only growth they could achieve would be same store sales growth.This is what makes same store sales an important figure.
Do you agree or disagree about the importance of same store sales figures?
-mfd-
{ 3 comments… read them below or add one }
I agree, they are important and I deal with same store sales every day at work. I would argue that in your example, the original 10 stores would likely make up more than half of that total revenue… the new 10 stores wouldn’t have been open an entire year to build up their customer base.
Yes and for precisely the reason that Tom mentioned above. Most of the revenue generated for any given company comes from sales from stores that have been opened longer than a year, possibly longer than 5.
However, I have had my qualms about solely weighing in on same store sales over a large geographic region like the US. That said, I think it would be interesting to look at that metric in smaller areas such as by states.
A real life example, would be tracking JC Penney’s growth in two years in the New York Metro region, given that they recently opened a store in Herald Square. I can already tell you that it will rise, but it isn’t because of how long the store has been open but rather the location. Hot tourist area, more traffic just by virtue of location and extremely competitive prices will all make for a successful store.
@tom – I totally agree and that’s what I was trying to get at with the example. There was a sentence in there that I think made that point a bit confusing. I’ve altered it a bit to clarify things.
@Rachelle – I think it would be a good idea to look at same store sales on a per region basis. Just as same store sales can be an indicator of growth in existing stores, looking at smaller regional areas can indicate if stronger growth region is supporting a flat/negative growth region. This would help investors determine why a company is continuing to open stores in a particular area.
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