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Chasing Comps

Wall street’s fixation with same-store sales began more than two decades ago. <BR><BR>Without standardization, are comps an exercise in faith, science or a false idol? <BR><BR>On the first Thursday of the month, hordes of retail executives rise...

Wall street’s fixation with same-store sales began more than two decades ago.

Without standardization, are comps an exercise in faith, science or a false idol?

On the first Thursday of the month, hordes of retail executives rise at dawn to complete a ritual they likely feel compelled to do: releasing the latest month’s same-store sales figures.

For Wall Street, digesting monthly same-store sales reports has become an obsession, one that is molding the way retailers manage their companies.

Most retailers hate chasing comps. And complicating the metric’s usefulness is that there are no single set of standards to measure same-store sales.

But this compulsion over comps is not going away because it is driven by the fact that same-store sales are the earliest indicator of retail chains’ momentum, or lack thereof. Same-store sales are released a week to two weeks before government-issued retail and consumer consumption reports, all of which feature data from the prior month. Especially during the pivotal holiday and back-to-school months, analysts can’t restrain themselves from eating up this data.

Same-store sales, or comps, measure the percentage change in sales for a month over the comparable period a year ago, usually at stores that have been open at least a year. The prevailing opinion is that younger stores haven’t reached their full potential.

Because comps are not judged under one standard or calculated in a so-called “black-and-white” way, analysts say releasing other, accounting-based monthly metrics would be helpful for a better monthly snapshot of a retailer’s health. But the chance of retailers providing more data, of course, is rather slim.

“There’s very little else to judge companies on [during the quarter], so analysts use same-store sales as a measuring stick,” said Walter Loeb, of Loeb Associates, a New York-based retail consultancy.

For many analysts, their unease over the attention Wall Street lavishes on comp reports stems partially from the fact that calculating comps is not standardized. Bob Buchanan, senior analyst at A.G. Edwards & Sons Co., said it best: “There’s tremendous variation in terms of when a store is included in same-store sales.”

This story first appeared in the November 15, 2004 issue of WWD.  Subscribe Today.

Comp stores are defined as anything from stores open at least 13 months, as most specialty apparel retailers define them, to stores open sometimes as long as 24 months, as Wal-Mart Stores Inc. defines them, he said. Those disparities can skew the credibility of comparing results from retailers in the same sector.

The same-store sales metric is the creation of Jerry Gallagher. In the early Seventies, Gallagher, a trade analyst at the institutional research firm Donaldson, Lufkin and Jenrette, was concerned that department store chain W.T. Grant Co. was expanding its store base too fast, even though sales were also rising rapidly.

“I felt they might be in trouble,” said Gallagher, now a managing partner at Oak Investment Partners, a venture capital firm. W.T. Grant would later file for bankruptcy, becoming one of the largest failures in retail history.

Knowing that it takes newer stores at least a year to mature, Gallagher contacted W.T. Grant’s chief financial officer and asked how sales at older stores had been doing.

“He said: ‘We don’t know that number, and we don’t think it would be useful for you to know,’” Gallagher recalled. So Gallagher concocted his own estimates, which “showed that W.T. Grant was having substantial declines in same-store sales….That was the genesis.” He subsequently began publishing a monthly publication with his same-store sales estimates for several other retailers, too.

Eventually, Gallagher said, the retailers “decided to have their accountants hammer out the numbers instead of me.”

By the Eighties “it really became an issue” for retailers who weren’t releasing monthly same-store sales, said Mike Niemira, director of research at the International Council of Shopping Centers. “Analysts essentially demanded they be reported.”

About four years ago, Wal-Mart took comp reporting a step further by issuing a weekly same-store sales update. Target Corp. also began issuing weekly comps updates. While many retail analysts describe the weekly sales reports as circumstantial information, the retailers’ goals, said Janet Hoffman, a partner in Accenture Ltd.’s retail practice, are “to show continuing momentum.”

So, what’s next? Daily sales reports? “I was thinking more like hourly. I want an hourly same-store sales report by location so I can really monitor it,” joked Jacques Roizen, a director at the restructuring firm Alvarez & Marsal.

Sarcasm aside, comp reports do have their merits. Beyond using the data to gauge a retailer’s sales momentum and assess its growth potential, analysts use the reports to analyze and compare sales on an historical basis, often going back five to six years.

For Hoffman, comps can be a good indicator of customer loyalty, which she called “the single most important measure” for retailers.

Same-store sales, to some extent, also measure market share between channels. But comps may be a flawed measure when it comes to showing the true health of a retailer. Gallagher echoed the view of many analysts: “Today, it is overused. [Comps are] very useful, but it has to be a balance of good analysis with other things. And too often it’s used in a way that is too simplistic.”

Roizen said, for example, that even though comps could be skyrocketing, it doesn’t indicate financial strength. The increases “could be fueled by heavy discounting, and you might not know about that until the quarterly report.”

That’s partly why Urban Outfitters Inc. doesn’t report monthly comps — even though its rivals, like American Eagle Outfitters Inc., do. Urban Outfitters’ cfo, John Keyes, said in an interview that issuing a monthly sales report “doesn’t really make sense to us” because “a retailer can take markdowns and generate just about whatever sales they want.”

So Urban Outfitters usually releases quarterly sales figures — including quarterly comps — about a week before releasing the quarter’s earnings. That way, “people will know very quickly whether the sales were purchased by markdowns. It’s much more reflective of the strength of the business, whether the sales really generate margin or not,” Keyes said.

Yet, interestingly, Glen Senk, president of Urban Outfitters’ Anthropologie stores, sees comp results a bit differently.

“I view comp-store sales as really a vote of where we stand with our customers,” Senk recently said.

On top of markdowns and clearance sales intermittently inflating comps, most analysts agree that factors outside of a retailer’s control can affect same-store sales, as well. A recent example would be the hurricanes that whipped up the East Coast late this summer.

Limited Brands Inc.’s chief executive Leslie Wexner sees same-store sales as a reflection of a retailer’s health. Wexner explained during an investor meeting that comps are “kind of, but not exactly, a synonym for profit.”

Comps, of course, aren’t an across-the-board foreshadower of profits, as is the case of Abercrombie & Fitch Co., which has been known for often reporting negative monthly comps, but increases in quarterly and annual profits. Fittingly, Abercrombie ceo Mike Jeffries told WWD in late August that he’s “not comp-obsessed,” especially since profits at the retailer have risen 37.9 percent annually in the past four years ended fiscal 2003. Abercrombie also recently reported a big 11 percent spike in October comps.

Yet, retail analysts have a fascination with comps because the numbers help them advise clients on whether to continue to hold on to a stock. Indeed, stock price fluctuations can be huge on same-store sales days because the reports often also update earnings forecasts. The revised outlooks, combined with perceived comp momentum, frequently lead to analyst upgrades and downgrades of retail stocks.

Perhaps Niemira best summed up financial analysts’ interests in monthly same-store sales: “Information is really the backbone of Wall Street.” He added, however, that if retailers didn’t feel pressure to report comps on a monthly basis because investors are hungry for more data, they would likely just report comps quarterly.

Regardless of whether Wall Street loves or hates comps reports, there are several other monthly metrics analysts say would give a satisfactory peek into the health of a retailer in between quarterly reports. They include: gross profit return on investment, inventory levels and turnover, sales per square foot, volume of gross margins, average rent per square foot, monthly customer counts, debt ratios and total units shipped.

Because the above metrics are based on accounting principles, maybe the real question shifts away from why Wall Street is obsessed with comps to why the Street is not pushing for standardized comp reporting. Standardization is an old idea, and it’s one both the Washington-based retail trade group the National Retail Federation and the ICSC’s Niemira, support.

Standards for when a store qualifies as a “comp” store could be different for different retail sectors. According to Gallagher, it takes new specialty retail stores about three years to reach their full potential, while discount and smaller department stores take five years. Larger department stores take roughly seven years.

Unfortunately, said Scott Krugman, a spokesman for the NRF, standardization is not likely to happen. “Individual companies don’t want to be dictated to about how they’re going to report their sales.”

But if retailers feel pressured enough to satisfy a Wall Street that is jonesing for monthly same-stores sales numbers, maybe mandating a comp-store standard isn’t such a far-fetched idea.

Key Take Aways

  • Retailers report same-store or comparable-store sales, “comps” for short, on the first Thursday of every month.
  • Same-store sales measure the year over year percent change of a store opened at least one year.
  • The comps metric is the invention of Jerry Gallagher, an equity analyst, who was trying to gauge the mature sales growth of a retailer.
  • Not all retailers release same-store sales figures.