Retail stores have lost a lot of their shine in the past few years as the rise of e-commerce has reduced foot traffic in malls and shopping centers. Even so, physical retail stores represent the majority of sales worldwide and are a $4.8 trillion market in the US. With that much money flowing, the more data you have the better.
One metric that retail stores (and the analysts that follow them) use to measure the health of their business is Same-Store Sales. Same-Store Sales are the difference in revenue generated by a set of existing stores over a period of time from the sales in those same stores in the same period of time a year ago.
For example, if we have 10 sporting goods stores which sold a total of $50,000 in August of this year and sold a total of $45,000 in August of last year the Same-Store Sales for our business would be $5,000. Often when large retailers report on Same-Store Sales it is in comparison to revenue, so we might report our same store sales as 11.1% growth ($5,000/$45,000) in Same-Store Sales instead of $5,000.
Right, so what?
Why calculate same-store sales? Retailers are constantly opening and closing stores to try and improve profitability. With store locations changing so often it can be hard to track the core performance of a retail business. For example, a large retailer might open a large number of new stores to make their Gross Revenue look better while the amount they sell in each store actually goes down.
By focusing only on stores that have been open for a while and comparing their historical performance, Same-Store Sales is a more stable indicator of retail performance.
Let’s break down the strengths and weaknesses of this metric.
- It’s very easy to calculate, so you can compute Same-Store Sales weekly, monthly and annually for any subset of the stores a retailer owns (by zip code, state, etc). This makes it a great tactical metric when calculated weekly and a great strategic metric when calculated yearly.
- Retailers can use it as a performance metric for store managers, by comparing Same-Store Sales of locations with similar locations and volume.
- Public market analysts love this metric as the percentage change in same store sales makes it easy to compare the health of different retailers regardless of size or industry.
- Even though a store might be in the same location as it was last year, it might be selling different products. It can be hard to take into account the shift in products and prices using such a simple metric and you might be comparing performance when it doesn’t make sense.
- By focusing on Gross, Same-Store Sales ignore that the costs of operating stores might be changing over time. If wages go up in a certain location, or if the cost of supply a store spikes it would not be reflected in most Same-Store Sales metrics.
As you’ve seen this week, no metric is perfect! We can pull apart even the most common metrics used by specific industries to measure their performance. I hope you apply the same level of critical thinking to your own metrics, since it will ensure you make better decisions with them.
Quote of the Day: “Whoever said that money can’t buy happiness, simply didn’t know where to go shopping” ― Bo Derek