The Same-Store Sales Reporting Debate
Last year when Home Depot, then under the leadership of Robert Nardelli, chose to stop reporting quarterly same-store sales numbers, the response from the investment community was less than enthusiastic.
At the time, Goldman Sachs analyst Matthew Fassler told CNNMoney.com, “We dislike any decision to reduce transparency, particularly one executed in a quarter when the measure in question most likely shows poorly. We can only surmise that [the decision] reflects a reality that this measure does – and will – reflect poorly on the firm vs. competitors.”
While analysts look to same-store sales as a gauge of a retailer’s health, some within the business itself feel as if the measurement is much less important than it is often made out to be.
Sears Holdings’ Edward Lampert has said the same-store sales metric has become “vastly overrated” and believes other benchmarks offer greater insight into how well a retailer is performing.
This week, the Women’s Wear Daily website ran an article that identified retailers including Bebe Stores, Charming Shoppes, Dress Barn, Guess, Gymboree, New York & Company and Talbots that have chosen to stop reporting monthly same-store sales in favor of quarterly accounting.
“I think we will see a big shift toward retailers reporting quarterly comps instead of monthly,” Eric Beder, specialty retail analyst at Brean Murray Carret & Co., told Women’s Wear Daily. “I used to be a big advocate of monthly comps, but now I think quarterly is the best way to go; there is too much noise associated with reporting monthly.”
Mr. Beder said too many variables can impact comp sales and therefore monthly numbers add an unnecessary element of volatility when assessing the relative strength or weakness of a company.
Ann Poole, retail analyst at Nolenberger Capital Partners, is an advocate of quarterly same-store sales reports. She told WWD.com, “Quarterly comps are usually reported at the same time as earnings, which gives investors a lot more information to digest and [with which to] evaluate the business. I think this eliminates some of the irrational weight that can be placed on a monthly comp.”
CL King analyst Mark Montagna said he understood the reasons behind retailers going to quarterly same-store sales reporting but that ultimately it will be investors who are hurt as a result.
“Overall, it’s a bad thing because companies should always be managing for the long-term anyhow and by not giving the monthly updates, it leaves more opportunities for investors to be surprised,” he said. “I think investors would rather have status updates along the way.”
Discussion
Questions: In general, how important are same-store sales numbers in evaluating
a retailer’s health? What do you see as optimum frequency for retailers to
report same-store sales numbers?
All of the numbers are important and help tell the story. However, if Wall Street only makes decisions on the numbers and not on the whole picture, then the numbers are not that important. Each company has some long term goals. Along the way some of the short term numbers may suffer while a transition is taking place. That is very different from a situation when short term numbers suffer and there is no transition in place or any other event that might offset those low numbers. The whole story is important–the numbers and the company plans and activities. One without the other does not tell the whole story.
Same store sales have different meanings at different companies and certainly expectations are different for young growing companies in hot categories of merchandise vs. mature companies in stagnant categories. Same store comparisons are useful and fair though, when scrutinized by retail intelligent management and analysts. Mr. Lampert is not a retailer. He has been very successful and he may ultimately make a score with the Kmart/Sears real estate but his track record on retail related matters is good reason to want to avoid reporting any and all numbers related to Kmart/Sears.
I think people are confusing two issues here: the availably of information, and what’s done with it; all else being equal, more info is better (though, happily, I saw no choices for daily or hourly reporting!); of course in the real world, things AREN’T always equal, and data is often rushed, or people draw foolish conclusions from it. But those defects aren’t reason enough to depart from long established norms…particularly when the advocates for said departure just happen to be the captains of sinking ships.
Comp store sales comparisons of units open one year or more create a halo effect that can be misleading, since newer stores tend to continue to outperform older stores in their second or even third years of operations.
Large retailers depend on this “second year effect” as an outcome of their rapid expansion. This appears to boost the apparent performance of older stores, and Wall Street seems to buy into this fiction. I say when evaluating these “growth addicted” chains we should look more closely at other performance metrics, especially average sales per square foot, average number of transactions per square foot and profitability per square foot.
An interesting comparison–if large retailers ever dared release this scary information–would be to compare same-store performances for stores open two years or three years.
The issue of not reporting comp sales is one we’ve been debating for a couple of years. It seems the only people who want to avoid reporting are retailers who are either relying on new stores to fuel their growth or those who have so many problems with their business they don’t want Wall Street or shareholders to know what’s going on with their business.
Yes, comp-store sales results are not the only way to evaluate the health of a retail business. But, they are one very important way!
As analysts, we often bemoan the ability of retailers to sustain anything like a long term focus. One of the key factors influencing short term thinking is the obsessive focus on monthly comp store reporting. Far too much has been made of limited data.
Having said all that, there is no doubt that comp store metrics remain an important aspect of analyzing retail health. As others have noted, it should be an aspect, not the sole determination.
I’ve noted in other spaces that the growth of online volume is another factor to consider in understanding comp store results. While shifting volume from brick and mortar to online isn’t anyone’s immediate “strategy,” it is happening, particularly in an environment where overall retail sales are projected to grow in the low single digits. If I see a multi-channel retailer with slow, flat or very slight comp declines but enormous online growth, I’ll earmark the retailer for future consideration regarding the brick and mortar business, but still feel bullish about the retailer as an entity.
If quarterly reporting of comp results helps retail management implement tactics and strategies which require more than a 30 day impact horizon, I’m all in favor of it.
There are 2 different financial reporting issues: frequency and completeness. For years, Progressive Corporation, a $14 billion insurance company, has reported its sales and profits in detail monthly, not quarterly. Progressive opted for maximum transparency. Most national retailers are certainly capable of copying Progressive. They have the figures internally. Failing to disclose monthly expenses and profits isn’t necessary, given the levels of technology all major retailers share. Ed Lampert’s objection to focus on comp sales: you can drive sales anytime if you’re willing to sacrifice profit.
Same store sales can never paint the full picture of a retailer’s financial health, but is one of several components investors and suppliers should be looking at. You need to look at inventory turns, profit per square foot, profit per employee and trends in both capital spending and cost of sales. It has always seemed to me that these indicators told a more complete story of a company’s long-term viability in the market, particularly the profit per square foot and profit per employee figures. As for the frequency of reporting, I agree with the analyst quoted in the article–monthly figures create a lot of noise in the market that leads to unnecessary volatility. Let retail executives spend time in the store instead of on Wall Street explaining themselves.
Comp store sales will always be an important measure for the investment community and should be reported monthly in order to get a true picture of seasonal sales–not the four seasons, but seasonal sales in retail terms.
If I were Sears, I wouldn’t be excited about reporting comp store sales either.
The publishing of monthly retail sales has become a de-facto economic indicator–an important one, IMO–especially if one collects data from around the world. The EU publishes a number. So does Hong Kong, among others. I hope that the tradition is fully embraced, and continues.
A case can be made for publishing only at the intervals required by the SEC. It’s tempting for struggling public retail companies to withhold this “voluntary” information.
My first job in retail was to report (internally) daily sales by store and department. Notwithstanding public reporting, all retailers are looking at sales under a stronger microscope than monthly.
Same-store sales figures are important but it’s important to know the story behind them. Often forgotten are the effects of inflation and population growth. For example, when Winn-Dixie reports a 1 or 2% increase in same-store sales, it’s really negative considering the effects population growth and inflation.
What about the effects of sister store closings? How much of Winn-Dixie’s increases reflect the closings of nearby sister stores? Here in Milwaukee, Roundy’s has suffered from negative same-store sales. On the other hand, they have managed to open so many stores and saturate the market that they now have in excess of 60% market share. The bad news is that most of the sales of a new store come from sister stores. The good news is that those sister stores were over-performing in the first place.
Wal-Mart will always struggle with same-store sales. Why? Because their stores over-perform compared to their peers. They need to open sister stores to take the pressure off of their existing stores. My rule of thumb is that if your stores on average are 20% above the norm in sales per square foot, you need to open more stores. This is going to have a negative effect on same store sales but a positive effect on overall sales and increased market share.
If you are like Winn-Dixie and Sears, it’s different. Those two are so far below the norm that even a minimal effort to improve should result in large percentage increases. But that’s not happening. When the lowest performing sales per square foot retailers can show big increases, then they are in trouble.
Finally, what are the same store sales figures at H-E-B or Wegmans? Nobody knows and nobody cares. They just run good stores…isn’t’ that the important thing?
Monthly reporting of comp sales is usually the only visibility provided to shareholders and other interested parties in the investment community until quarterly results are reported. So it’s a valuable benchmark and–let’s face it–it also gives a sense of “winners and losers” in an industry known for competing over market share. It’s important, however, to go into a fiscal quarter understanding how calendar changes and comparisons to last year can affect this year’s numbers, so as to avoid an overreaction one way or the other. There are other benchmarks in the balance sheet and income statement that mean a lot more over the long run.
Why not have retailers report same-store sales, as well as sales per gross square foot, on a trailing annual basis? This combined reporting would permit ready comparison among retailers within the same category, promoting maximum transparency. If retailers choose to report quarterly, that would be a fair trade off for better disclosure.
It sounds reasonable to fix on quarterly comps, as the numbers can then be considered in context with all the other quarterly stats–but let’s face it: retailers live day by day!
It is important for investors to know how a retailer performed in the heavy-promotion periods–everything from Mother’s Day to Memorial Day to Halloween. There are certain weeks that are make-or-break on the retail calendar. Why wait two months to find out?
How the retailer did against the previous-year comps, how it did against its class and vs. competing classes of retailers, each of these are metrics that we really need to see on a monthly basis.
Indeed, in a world where investment decisions are made not only monthly, but by the minute, the reporting of comp store sales on a weekly track is not out of proportion to the reality of what’s happening on the selling floors–and what that often precipitates in the board rooms.
As a former retailer, I can tell you this; there is no more indicative number than “likes to likes” or comp store comparisons. Indicative of what is something you’re going to have to explain, good or bad…but undoubtedly the best initial metric barometer.
There may be a story behind those numbers, but that’s secondary. Is your merchandise, marketing and execution as good as last year? It better be. And that’s primary.
Not reporting that number as frequently as possible is a flat-out cop-out. You need to make your investors as aware as possible–it’s your duty to them.
By itself, same store sales comp data is largely irrelevant. The ritual monthly reporting of same store sales has become “important” to Wall Street analysts, but I believe it creates a false sense of what’s really happening in a retailer’s stores and potentially makes analysts more complacent.
Eddie Lampert’s right that comp store sales can be manipulated. (Heck, I even knew one retailer who INCREASED PRICES slightly to help their comp store sales in the face of shrinking traffic and transaction numbers!)
I’m far more concerned with understanding traffic counts, conversion rates, average transaction units, dollars and profitability before knowing comp store sales.
If I were named CEO of a retailer tomorrow, one of the very first things I’d do is refuse to report monthly comps. And you know what? Analysts wouldn’t like it, but they’d respect the fact that I was looking at the longer term. After all, the reason that they attacked Nardelli is because he waited 3 YEARS to do this; had Nardelli stopped reporting comp store sales on Day One, analysts wouldn’t have loved it, but they would have understood and respected his decision.