For investors looking at retail businesses, same store sales is considered the most important metric. If you’re just looking at overall revenue growth for a retail business, an increase in the amount of stores could hide declining revenue per store. So investors look to same store sales to see how a retail business is going.
But this article suggests we need to be careful when looking at same store sales. Eddie Lampert is an incredibly controversial character after failing to turn around American retailer Sears Holding but his quote here suggests some of the pitfalls:
“For retailers that aggressively open new stores, the reported SSS metrics are helpful, but far from complete. Rather, an investor would want to know how the stores greater than four years old are doing from a sales and profit perspective and how much money is being invested in those stores. In addition, an investor would like to know what is being spent on the newer stores and how they are performing from both a sales and profit standpoint. Without that information, any interpretation of SSS performance lacks real meaning. But so often today, SSS figures are cited without providing that critical additional information – giving investors only part of the picture.”
If a company does $1 million in sales and the next year does $1.1 million – that’s a 10% increase in same store sales. Great. But if the company has invested a million dollars a store to renovate it and buy new equipment, but then only generated an extra 10% in sales – then, was it worth it?
This article also takes a look at two case studies – Krispy Kreme in 2004 and Starbucks in 2007 – and shows how the same store sales metric could look alright, while there were material issues with actual sales per store.
There is no doubt that same store sales is an important metric for investors in retail businesses. But, just like any metric, it can offer an incomplete picture of a company’s fortunes. So it pays to understand where the metric can be helpful and where it has shortcomings.
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