Home Depot: Mum’s the Word on Same-Store Sales
By George Anderson
Industry analysts and others are questioning Home Depot’s recent announcement that it would no longer report same-store sales performance.
Many wonder if the move signals a significant weakening in the chain’s business or if it simply is tired of looking bad in a side-by-side comparison with the company’s chief rival, Lowe’s.
Goldman Sachs analyst Matthew Fassler said he was troubled by the home improvement retailer’s decision, especially coming off a weaker than expected quarter.
“We dislike any decision to reduce transparency, particularly one executed in a quarter when the measure in question most likely shows poorly,” he told CNNMoney.com. “We can only surmise that [the decision] reflects a reality that this measure does – and will – reflect poorly on the firm vs. competitors.”
George Whalin, CEO of Retail Management Consultants, was even more blunt about Home Depot’s decision. “This is a terrible way to do business,” he said. “This is a publicly traded company with thousands of investors. Same-store sales are a key measure of evaluating how a retailer is doing. It’s dishonest and irresponsible for Home Depot to withhold this information from its stockholders. It gives the perception that the company has something to hide from the financial community.”
Others were equally puzzled by the DIY chain’s decision.
Ken Perkins, retail analyst and president of research firm Retail Metrics, said, “It’s curious that of all the metrics that they could have withheld, they chose this one. Same-store sales are a good measure of a company’s organic growth. They show how well or nor a company is doing because new stores tend to be big sales generators.”
Marshall Cohen of the NPD Group said he can understand why the retailer is moving away from same-store sales as a gauge for company performance.
“Home Depot is trying to transform itself into a bigger and better retailer and grow sales,” he said. “It’s challenged by a lot of obstacles along the way, and I can understand that the company doesn’t want to be pre-judged on its sales numbers while it makes those changes.”
Many, however, are of a different opinion.
“There a small portion of retailers who maybe think that same-store sales aren’t important to use to evaluate them,” Retail Management Consultants’ Whalin. “I say it does give a sense about how the business is really doing. It’s every bit as important as the profit number.”
“If a retailer’s same-store sales are growing along with its profits, it means it’s a successful company,” he added.
Moderator’s Comment: How important or not are same-store sales in evaluating the performance of a retail business?
Are there other metrics that you believe provide a clearer picture of retail performance? –
George Anderson – Moderator
OK, I don’t think this is such a great idea either — at least not from a PR / investor relations point of view.
But perhaps there is one supporting argument for this move that we can make. An inevitable eventual result of store growth is market saturation. At some point the retailer who a) believes only one player will be left standing in each space, and b) intends to be that retailer, has to choose to compete with themselves. In other words, build additional stores in markets where the inevitable result will be existing store cannibalization. Of course, this would be done to drive the remaining competitive store (i.e. Lowe’s) out of business. In the interim of course, same store sales have to suffer and, if that is how your enterprise is primarily being evaluated, your market capitalization will also suffer. Perhaps even enough to hamstring your strategy in mid-stride.
I don’t know if this is HD’s rationale for this move. I don’t even know if they are approaching this level of market saturation yet. But Wal-Mart is making this very decision and paying for it in the press and investment community as same store sales suffer. Perhaps HD has read the stories and just doesn’t feel they can (or want to) weather that storm.
It is very hard to measure the overall business productivity when same store sales are eliminated from reporting results. I’m interested to hear more on why the Board of Directors and Leadership team made this decision, and why they feel it is in their shareholders best interest to eliminate same store sales results from their quarterly and annual reporting results. I would think the shareholders and the investment community will demand more explanations.
The investment community and shareholders are demanding greater transparency and details on more financial measures and accountability in light of World Com, Enron, etc., and this is a step in the opposite direction.
I think for many companies same-store-sales is an important figure. Whether the company thinks so or not, I would not invest in a company that keeps this information secret. It tells me they have something to hide. If the numbers were good, they would be shouting it loudly to Wall Street.
Still, same store sales can be very misleading. Winn-Dixie, for example. After they closed hundreds of stores, then Hurricane Katrina closed several more for them, obviously the the stores that were left open received a big increase from the population shifting, free food vouchers from FEMA, and the lessening of the sister-store impact effect. What some people forget is that the competition also experienced huge same store sales as well. Wait a year from now as the free handouts stop, Wal-Mart gets stores back open, the the population slowly returns to New Orleans. Winn-Dixie won’t be bragging about same-store sales.
From personal experience, I always discount same store sales by the inflation rate and the population growth rate. If same store sales are up 3%, inflation was 2% and population was up 2%, then in reality, sales fell by 1%.
Another good example is to look at Whole Foods. They often report double digit increases in same store sales. Quite impressive. The industry in general is doing quite well. But then look at Wild Oats with same store sales up only 4%. To the average investor, 4% looks OK — if you are a vanilla chain grocery store. But for the booming natural foods industry, that is terrible. There are some small co-ops out there growing more than 25%. If Whole Foods stopped reporting, Wild Oats might start looking better than they really are.
They are a public company and have a responsibility to stockholders to communicate in an expected and normal way and in retail that is same store sales. There has been a lot of abuse and bad decisions that have resulted from the emphasis on these figures and the importance of stock price and the stock options the executives own in retail companies. Sometimes biting the bullet and enduring a bad month (or season) can be a good long term strategy but too many store executives make decisions that are overly influenced by the need to have the “figures come in right” as opposed to decisions that “make the store right.” Because of this, privately held companies such as Crate and Barrel and Container Store have a great advantage in the marketplace and with consumers because the pressure is not as great to artificially produce results and they are making more decisions for the right reasons.
Didn’t Ed Lampert (Sears Holdings) do the same thing when he brought Kmart out of bankruptcy and has now done the same thing again with Sears? New Trend in retail management?
Mark Lilien said it best, saying great companies have nothing to hide. Why release any financial information? Why can’t companies like Home Depot just say “trust us, the numbers are good,” and let it go at that? If they get their way, they won’t be too far from that. This reminds me of a local college nearby that wanted to do away with letter grades on students and replace them with a nice letter from their professors. Golly, we wouldn’t want Home Depot’s self esteem harmed by having everyone know its same store sales figures are not flattering. I doubt they will go through with this plan. Maybe they just made this up because some insider needs the stock to dip for a day or two.
“We’re not going to give 4Q results because we don’t think they’re meaningful, but you have our first 3 quarters and we’ll give you the annual, so you can figure it out if you want.”
I doubt any investor or analyst would look kindly on that thinking, and they won’t like HD’s any better.
No, SSS figures aren’t perfect indicators, and yes, a thinking person can more-or-less figure them out (assuming # stores hasn’t changed drastically),and yes, (much of the time) too much emphasis is placed on short-term results, but this is hardly the way to start a reform movement in financial reporting: suspicions over motivation and general resentment over perceived arrogance are likely to override everything else.
A number of articles have appeared recently comparing HD’s militaristic – literally – management methods with Lowe’s (relatively) warm and fuzzy ones, and this appears to be the perfect Exhibit A on that point.
The only charitable comment I can offer is that perhaps HD is trying to latch onto another fad: Suduko is all the rage, maybe they’re trying to bring fill-in-the-blanks to the financial world.
Bucking the trend here, I have to say that using same store sales figures is taking them out of context and potentially giving misleading information. The fact that most other stores do it makes it harder to be the first to say no but someone has to take the lead. If this discussion is anything to go by, Home Depot will probably be bullied into releasing information that they do not necessarily want to be judged by so perhaps they can take the opportunity to surround their figures with all the relevant ifs, ands and buts to the future benefit of everyone in the industry.
One has to be troubled with HD’s approach. It seems to be quite arrogant. When you view this latest decision with the recent news of the board voting to protect management’s compensation in view of the company’s lackluster performance. I’m sorry but as an investor, I’m taking my lumps and heading for the door.
Management’s cowardice seems to be pervasive. Obviously the numbers are unflattering, one has to wonder how bad they truly are and how much more management is going to get in bonuses and deferrals.
Someone needs to tell management that “Spring Break” is over and it’s time to get back to reality.
The best measure of improved productivity is the amount of volume (sales or gross margin) generated within the same physical amount of space. Obviously one has to balance this against the investment needed. From a shareholder perspective, measures like GMROI expressed as a percentage or fraction don’t really speak to growth of capital or overall wealth. Generally, but not always, same store sales increases do.
Is this a good idea? I hate the monthly and quarterly result focus of too many retail executives brought on by the Wall Street addiction to short term returns and arbitrage. But doing away with one of the most insightful measures of comparative performance simply cannot be good for an investing public.
Same store sales numbers are important to investors and suppliers alike. Investors use this number as a gauge to see how well the retailer is doing. It indicates the how and wheres of the revenue numbers.
For the suppliers, the number indicates how they are doing in comparison to the overall increase/decrease in same stores. This helps a supplier in planning.
Concealing or changing the way numbers were reported or shared can be a source of nervousness that, in reality, could be avoided.
I’ll bet there are a few other retailers hoping that Home Depot gets away with this, so that they can follow suit.
Same store sales is a powerful measure of how well the stores are competing in the marketplace. Growing same store sales is not easy because you have to market better than your competitors, who are going after those same gains.
I’m not surprised with the sell-off of Home Depot stock. Their decision seems to me an indication that Home Depot is frustrated by the competition and doesn’t want to keep score anymore.
Investors and creditors always want to know the most they can. The securities laws encourage transparency because better-informed investors help allocate capital rationally. No single measure gives any investor a perfect picture of a firm’s strength. Investors and creditors look at debt, sales, margins, return on investment, inventory levels, profits, etc. If all flawed measures were taken away, there’d be no measures at all. Not reporting comp sales is a sign of contempt towards investors and lenders. Great companies have nothing to hide.
Without comparable sales numbers you are not able to isolate the effect of opening and closing stores on your annual volume of sales. A company would be able to continue to report a growing volumes of sales — due primarily to new store openings — while at the same time the existing base of their stores are not performing well, i.e. with sales growth less than the inflation rate. This pattern would be able to continue until the volume of new store openings can not be sustained. Then a sizeable drop in sales should appear due to the absence of the “fix” from new store openings. Without comparable sales information, investors will find it difficult to measure this risk.
A good analyst still ought be able to take their current information plus total sales volumes — allow for the estimated effect of new store openings and closings volumes — and then estimate their sales comparable growth within a range — at least for a while. Naturally, one wonders why a successful company would want to make it more difficult to analyze its operations in this way.
This is move is not useful, especially when Home Depot is increasingly criticized for the pay package of its CEO, Nardelli. Today’s New York Times reports that he gets $245 million over 5 years, even in the face of lackluster performance. Much of this outrageous pay is attributed to a too-close Board.
While I am discouraged by the short term mentality of Wall Street investors and the effect that it has on public companies, hiding important performance numbers like this is not good. It can only mean that their numbers are not good and they think that they will suffer less from the reaction of not releasing them than they would from the actual same store sales numbers.
This coupled with the atmosphere in their stores lately combines to give me a feeling of retailer desperation. While I doubt and hope that things aren’t as bad as they seem, one can only wonder. And their not releasing same store sales will only add to that suspicion.
Yes, Lampert has done the same with Sears and Kmart. The only difference is that at Sears/Kmart, they don’t have a business plan, and they don’t care about their sales levels!!! As long as they are making a profit, their sales could fall through the floor (as they have), and it wouldn’t make one bit of difference to them! They are so focused on profit and money that they will lose more and more customers to the point where it wont be possible to make a profit unless they sell more and more of their real estate. Eventually, Sears and Kmart will be gone. We don’t really need them anyways, do we? We have Best Buy and Home Depot for appliances, Best Buy for electronics, and Wal-Mart and Target for clothes.