Same-Store Sales
Same-store sales are a form of benchmarking how each store under a brand name is performing on the basis of sales revenues.
What is Same-Store Sales?
Same-store sales, also known as comparable-store sales, is a financial metric used by companies within the retail industry. It measures sales growth or decline from a company’s store that has been operating for a year or more.
The same-store sales figure helps provide perspective as it allows for comparing established stores of a company over an accounting period, typically a fiscal quarter of a year or calendar quarter or year.
Reviewing and understanding same-store sales helps identify what portion of a company’s sales is a result of sales growth from existing stores versus sales growth from newer stores that have been operating for less than a year.
Same-store sales figures are often expressed as a percentage of either an increase or decrease in sales.
For example, suppose a company reported an same-store sales figure of 10% for a given accounting period. In that case, this means that sales from its existing locations grew by 10% over the previous period.
Same-store sales allows investors and creditors to gauge the health and performance of a company. It enables them to gain insight into a company’s operations and predict future performance.
Additionally, same-store sales is important to analysts as it can be used as a driver to forecast a retail company’s revenue. This allows for more accurate forecasting than simply growing aggregate revenue by a growth rate.
Key Takeaways
- Same-store sales are a form of benchmarking how each store under a brand name is performing on the basis of sales revenues.
- This metric can be interpreted to understand new promotional strategies for marketing and driving more foot traffic to increase sales.
- Companies use methods to achieve more sales in every store by keeping up with trends, running new marketing tactics, and increasing foot traffic.
Importance of Same-Store Sales
Same-store sales figures provide vital analysis to the management of a retail company and for investors in evaluating the company's historical performance. Some examples of analysis same-store sales are described below.
Gauging the effectiveness of management
Investors typically use same-store sales to gauge the effectiveness of a company’s management in producing sales growth from its existing assets, such as its existing stores.
Seeing that a company’s same-store sales is increasing is viewed positively as it means that the company is doing an excellent job in retaining its customers and attracting new ones.
Foot traffic
Same-store sales can indicate whether foot traffic into stores is increasing or decreasing. If it is rising, it means that strategies are working, and the company is experiencing demand for its products and services.
Business trends and decision-making
While a company may open new stores over time, comparing store sales for those operating for at least a year provides insight into the company’s organic growth. Same-store sales helps a company’s management in making future decisions.
For example, increases or decreases in same-store sales figures usually result from price changes in a company’s products, changes in the number of customers visiting a store, or changes in the size of purchases of an average customer.
Note
If a company has consistent, positive same-store sales , this will convince management that the company can expand and meet this rising consumer demand. On the other hand, if it had a negative same-store sales , it may convince management to close down underperforming stores and allocate capital to more successful stores.
Competitors
A decline may indicate that new or existing competitors offer the same products at lower prices, thereby compelling customers to shift toward substitutes.
Economic indicators
High same-store sales figures indicate consumers have higher disposable income to spend on discretionary items like clothes, shoes, electronics, and other similar items, and vice versa.
Therefore, investors and analysts tend to view same-store sales as a confirmation of the direction of an economy.
Formula for Same-Store Sales
The formula for same-store sales is:
Same-Store Sales = [(Total Sales(previous period)/ Total Sales(current period)) - 1] * 100
Where:
- Total Sales(previous period) refers to total sales generated in the previous period, i.e., previous year or quarter.
- Total Sales(current period) refers to total sales generated in the current period, i.e., current year or quarter.
Example of Same-Store Sales
Let’s look at some of the examples below:
Calculation of same-store sales with one store
The management team of WSO Pizza wants to evaluate the performance of its only store. In 2022, ABC Pizza recorded $200,000 in sales; in 2021, it recorded $150,000 in sales.
| Fiscal Year | 2021 | 2022 |
|---|---|---|
| Sales | $150,000 | $200,000 |
| Number of Stores | 1 | 1 |
Same-store sales = (200,000/150,000) -1
= 0.33 * 100
= 33%
Calculation of same-store sales with multiple stores
WSO Coffee Inc. wants to determine its same-store sales. The management of WSO Coffee Inc. mentions that in 2021, the company will operate 100 stores across the US and generate total sales of $500,000. In 2022, WSO Coffee Inc. opened 50 new stores across the country.
The company generated total sales of $900,000 in 2022.
| Fiscal Year | 2021 | 2022 |
|---|---|---|
| Sales | $500,000 | 900,000 |
| Number of Stores | 100 | 150 |
Each Store Sales = 900,000/150
= 6000
Total Sales in 2021 = 6000 * 100
= 600,000
Same-store sales = (600000/500000 ) - 1
= 0.2 * 100
= 20%
Interpretation of same-store sales
A positive same-store sales figure is viewed favorably, while a negative figure is viewed unfavorably. From the examples above, WSO Pizza and WSO Coffee Inc. demonstrated positive values of 33% and 20%, respectively.
This positive trend indicates growing demand, where both companies may even entertain the idea of expanding further.
Conversely, negative same-store sales growth indicates diminishing interest in a company's products and services. Therefore, the management teams must find the root cause of this deteriorating demand.
Additionally, an increase in same-store sales typically sparks confidence in investors and may help raise a company’s stock price and vice versa for a decrease.
Both management and investors need to consider same-store sales figures and other metrics to assess a company's health and performance.
Lastly, whilst a positive same-store sales is preferred, it may not always be viewed favorably. For example, if a benchmark is 20%, and a company reports its same-store sales as 10%, it signals that the company performed weakly.
Similar to before, the management of such a company must find the root cause of the below-expectation same-store sales .
How companies improve same-store sales
Positive same-store sales enables them to assess a company’s operations and predict its future performance. A company’s management understands this importance and therefore utilizes tactics to improve traffic into its stores and drive sales to improve its same-store sales. Examples of these tactics include:
- Maximizing sales from existing customers
- Running promotions
- Driving foot traffic
- Being aware of trends
- Maximizing sales from existing shoppers
Companies may upsell by selling a higher-tier product version or cross-sell by recommending complementary products to items purchased by customers. Let us consider some of the most common ways companies improve same-store sales below.
Running promotions
Running a promotion is often the tactic for retail companies who want to increase sales as they are effective in attracting and converting shoppers. Promotions would typically be run on higher-priced products to drive sales, ensuring a company’s profit margins aren’t thinned too profoundly.
Driving foot traffic
To customer traffic into stores, management may work on improving things like:
- Ensuring stores are easy to find
- Parking available to would-be shoppers
- Having attractive lighting, displays, and scents
- Other incentives to compel the shoppers to enter
Awareness of trends
Staying abreast of trends is essential for driving sales. Examples of trends include slack shorts in the summer or items driven by pop culture.
So, by being on top of trends and having appropriate inventories, retail companies can cater to these trends rather than lose customer traffic to competitors.
The evaluation of same-store sales unveils a comprehensive understanding of a business's inherent growth. Businesses can extract invaluable insights into consumer behavior, market trends, and overall operational efficiency using the data behind same-store sales.
This analytical approach becomes the linchpin for strategic decision-making, offering a competitive edge in the dynamic retail landscape and beyond.
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