Understanding Same Store Sales

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.