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What is comparable store sales?

Comparable store sales is a metric used by retail businesses that measures the revenue growth of stores that have been in business for at least one year. Sometimes referred to as comparable store sales, this is an important metric for evaluating the organic growth of existing stores versus growth through store expansions. Ideally, investors want to see improvements in both.

Retail stock investors need to know how a company reports same-store sales, what it means to shareholders, and why analysts pay close attention to the metric. Keep reading to learn more.

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Understanding same-store sales

Comparable store sales can tell us how much of a retailer’s sales growth is organic and driven by store-level factors. This growth could be due to increased foot traffic, an increase in the average basket price, or a combination of these.

Same-store sales growth is a simple number for a retailer to calculate. Revenue is taken for a given period, usually a quarter or a year, and sales are subtracted from stores that have been in operation for less than 12 months. The sales are then taken from the prior year period and the revenue generated by the stores it no longer operates are subtracted. By dividing the first figure by the second, we obtain the growth of comparable store sales.

The number is expressed as a percentage growth rate. So if a retailer’s stores generated $1 billion in sales last year and those same stores generated $1.05 billion this year, the same store sales growth was 5%.

Why same-store sales are important

Strong comparable store sales are a sign of a healthy business. If a business expands to new locations, but its same-store sales decline, it may be operating inefficiently. New locations could cannibalize old ones. Money spent on new locations can be better spent improving operations at existing stores.

If comparable store sales are steadily declining, this signals to investors that the business has limited growth potential. You can only open a certain number of new slots before the market is saturated. If every store can continue to increase sales year after year, the revenue potential is limitless.

Ultimately, strong same-store sales growth is an indicator of good operating performance. This indicates management’s ability to generate a strong return on assets by using existing store properties to sell more inventory.

Management can use comparable store sales to identify underperforming locations. He can then make decisions on how to improve sales in those stores or whether to close those stores.

Management may also use comparable store sales to identify the impact of competitors opening stores near its existing stores. If a store goes from increasing sales at above-average rates to below-average levels after a competitor moves in down the street, this indicates that it is seeing a significant impact. Similarly, management may also be able to tell if their new stores are cannibalizing older stores.

Same-store sales can also be analyzed in the context of overall consumer spending. If consumers are spending more on both consumer staples and discretionary purchases, investors should expect to see comparable store sales keep pace with the rest of the industry in which a retailer operates.

Example of comparable store sales

Target (NYSE:TGT) provides its investors with a breakdown of its same-store sales in each earnings report, including the impact of its growing e-commerce operations on the metric.

Here’s what the company wrote in its full-year 2021 earnings release: “Full-year sales increased 13.2% to $104.6 billion from $92.4 billion l year, reflecting a 12.7% increase in comparable sales combined with non-mature store sales.”

As you can see, the bulk of Target’s revenue growth has come from improved sales at its existing stores. New stores, or “non-mature stores”, produced a 0.5% increase in sales for the year.

For reference, Target opened 29 net new stores in 2021, an increase of about 1.5%. Not all of these stores were in full operation for the full year, so their contribution to sales growth should be less than 1.5%.

Target further explains how it increased same-store sales. The company recorded a 12.3% increase in the total number of transactions and a 0.4% increase in the amount shoppers spent per transaction. Target generated revenue by getting more people to shop at its stores in 2021 than in 2020.

However, given the rate of inflation, it looks like shoppers spent less in real dollars per trip than they did in 2020. Should investors be worried? 2020 has been an interesting year, to say the least, and most shoppers have tried to make as few trips to the store as possible. Therefore, fewer trips with larger baskets made sense for 2020, and that trend reversed in 2021. Target’s same-store sales growth has always far outpaced the rate of inflation.

Target also details the impact of digital sales on its comparable store sales metric. Stripping out the impact of the 20.8% growth in digital sales, comparable store sales grew 11% in 2021. This is another great look at physical store performance.

Related investment topics

Net income from same-store sales

Understanding comparable store sales and the impact of various factors on this metric is important when analyzing any retail business. If a retailer is expanding into new locations while comparable store sales growth is declining, a potential investor should conduct further analysis. It can be a short-term blow or a warning sign to stay away from investing.

A business that produces consistently strong same-store sales growth has much more potential for long-term growth and improved profitability than a store that can only grow by expanding into new locations. Investors will want to find the former and avoid the latter when researching retail stocks.

Adam Levy has no position in the stocks mentioned. The Motley Fool fills positions and recommends Target. The Motley Fool has a disclosure policy.