A Crucial Number to Follow
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
We all like companies which increase their sales and earnings over time, but investors need to pay close attention to the different sources of growth in certain industries. It´s one thing to increase sales via new store openings, but generating more sales with the same amount of square footage is a much more powerful and sustainable growth strategy which translates much better into higher returns for investors.
Same store sales, or comparable store sales, is the expression usually used in retail and restaurants to talk about the evolution in sales at stores opened for at least a year. The idea is to differentiate growth in existing stores from the effect of new store openings. And there are good reasons to make that differentiation.
There are different financial implications from those two sources of growth; new store openings usually mean higher expenses, so growth in sales from more available space tends to carry lower profit margins. On the other hand, increasing same store sales produces the opposite effect: growing profit margins for each dollar of sales. The difference can be quite substantial over time, and have a dramatic effect of the company´s earnings and cash flow generation.
Furthermore, same store sales provide important information about the health and expected growth in demand for those products or services. When a company can increase store count without decreasing the productivity of existing stores, demand is growing strongly enough to absorb the current expansion rate. This means that above average growth rates can be expected for some time judging by the response from customers.
One clear example about this idea is Coach (NYSE: COH) The marketer of high end accessories has achieved positive numbers in same stores sales through many years, and the trend is not over yet: Coach reported a 6.7% increase in same store sales for the North America region in the last quarter. Positive same store sales, coupled with new store openings and geographical expansion into high growth countries like China provide very strong drivers for growth in the following years.
Coach has profit margins above 73% at the gross level and operating margins above 30%. The company´s ability to increase sales at existing stores is one of the factors that have produced these extraordinary margins over time. When looking at the future, Coach Investors have reasons to be optimistic about growth prospects, the company is still performing well in its more saturated markets like North America while countries like China show a fabulous potential, with sales increasing by a 60% in the last quarter.
Although coming from a different industry, Starbucks (NASDAQ: SBUX) is another company in which we can identify strong growth opportunities via both same store sales and geographical expansion. Starbucks reported an 8% increase in same store sales in the Americas region, which means that the company doing well in its most traditional markets.
Sales in the China Asia Pacific (CAP) region increased by a 32% in the quarter, and same store sales where an 18% higher in that geographical region. Looking at these two figures, the growth story in Asia is barely starting for Starbucks and there is still much more room for expansion.
In contrast, investors in Best Buy (NYSE: BBY), for example, could have saved themselves a lot of trouble if they had paid attention to the company´s comparable store sales in the last years. The electronics retailer started reporting negative comparable store sales in the third quarter of 2009, and it hasn´t really recovered since them.
Except for some particular months which showed a few false recovery signals, the trend hasn´t been healthy for Best Buy´s same store sales since the recession, and investors have lost nearly a 50% of their investment in the company during the last two years. Starbucks and Coach, on the other hand, rewarded shareholders with juicy returns supported by growing same store sales in the same period.
There is no individual statistic which can give us a complete idea about the investment merits of buying a particular stock. In industries like retail and restaurants, however, keeping track of same store sales is a powerful tool to select the best companies in the sector; and it also helps at avoiding the most expensive mistakes, which can be such as important.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Best Buy and Starbucks. Motley Fool newsletter services recommend Coach and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.