Stores generate sales in several ways including increased sales in existing stores and by adding new stores. When investors decide to invest in a store, one of the metrics they look at is whether the store’s sales are growing excluding the opening of new stores. This measure is known as same store sales, “comparable store sales” or “comps.”
Same store sales measures the sales in retails store that have been open for more than a year. The metric doesn’t include new stores that have been opened in the past 12 months. A newly opened store is included in the same store sales calculation 12 months after its first full month of being open. So, for example, a store that opened in April 2009 won’t be included in same store sales until May 2010. Comparing same stores sales lets investors and other analysts figure out which sales are due to true growth of the store and which are due to new store additions.
Ideally a chain’s retail same store sales are increasing each month compared to the same month in prior years. When same store sales, and even forecasted same store sales, begin to drop, investors typically start pulling their money from the store’s stock because the store’s revenue – and subsequently the stock’s value – is expected to fall.
What Influences Same Store Sales
Same store sales are driven by two key factors: prices of products and the number of customers. When prices increase, sales will also increase, assuming the number of customers stays the same. Similarly, when the number of customer’s increases, sales will also increase, again, assuming prices stay the same.
It is when prices or the volume of customers decreases that same store sales drop. More often than not, it’s a reduction in customers that causes a drop in same store sales. Rarely, price discounting can lead to a decrease in same store sales.
There are some things that could skew same store sales either positively or negatively.
- Stores closing could lower same store sales since there are fewer stores reporting sales.
- Stores sometimes use discounts to encourage sales which would result in lower same store sales even though the amount of merchandise sold was higher.
- Prices may have increased over the past month or quarter which could result in higher same store sales, but not because more merchandise has been sold (which is the ideal way for same store sales to increase).
- Longer quarters and holidays falling in different quarters can also have a significant impact same store sales.
Falling Same Store Sales
A continuous drop in same store sales is generally a bad thing because it indicates the company is losing money. It could be that people are no longer interested in that store’s brand, perhaps because consumer buying habits have changed or because a competitor has a more attractive product or price. A failing economy could also be the blame for a decrease in retail same store sales. Perhaps the store’s discounts are too high.
Companies and investors have to figure out the underlying reasons that same store sales are dropping to decide the long-term fate of a particular company. Is this a temporary drop in sales that the company can recover from? Or is this a problem that will result in the company’s demise? One way to answer this question is to look at competitors’ same store sales. If competitors are also suffering, then things this could be a short-term blip. On the other hand, if competitor’s sales are doing well, it could mean something bad for your company.
When you’re using same store sales to judge a company’s health, look at the trend of same store sales over a period of time rather. Judging only a few periods won’t give you a good look at the store’s long-term success. You shouldn’t use same store sales as the only predictor of a company’s success or failure. Make sure to look at other indicators to decide whether a company is a good investment.