Same store sales (also known as comparable store sales, or comps) are the most important metric in the retail industry. Let's talk about what it is and a couple nuances on how to analyze the number.
Sales growth at stores open 12 months or longer. Some companies also use different definitions, like sales growth at stores open 14 months or longer. Another way to look at it: sales growth excluding sales from new stores.
As is usually the case, reported quarterly results never give the full picture of what's going on at a company. We make adjustments (like excluding certain one-time expenses or income items) to figure out what the underlying results. Once we have an adjusted number, we can then project future numbers with more accuracy.
Same store sales is another adjustment that we make to get a more accurate picture of sales trends. We exclude new stores because they're growing from a base of 0, and will make overall sales growth look abnormally high.
Here's an example. Let's say that Home Depot opens 100 stores in India where they previously had no presence. Sales would grow significantly within those stores as people find out about Home Depot and come in to buy some items. However, after a year, those stores aren't going to get the initial boost that comes from having a new store in a new market. Their sales trends will begin to normalize and you'll get a more organic and sustainable growth rate going forward. This is what comps try to measure.
The concept of "comparisons" is entirely mathematical, and yet it's one of the most discussed topics among professional investors. Comparisons refers to the prior growth rate that the current growth rate will have to be calculated off of. For example, for a year-over-year calculation in 4Q14, the comparison will be the growth rate in 4Q13. For a sequential user growth calculation in 4Q14, the comparison will be the growth rate in 3Q14.
Why is this important? It's harder to post a good growth number when the comparison had strong growth, and it's easier when the comparison had weak growth.
Here's an example. Back in 2Q12, Home Depot posted a weak comp of 2.1% due to weather-related issues. In 2Q13, investors believed that the quarter would benefit from the easy comparison, and HD ended up posting its strongest results of the year with a 10.7% comp. The opposite occurred in 4Q13 when HD was facing its most difficult comparison (a 7% comp in 4Q12) and ended up posting one of the weakest comps of the year in 4Q13.
It's important to remember that comparisons aren't necessarily going to be the biggest impact on comps. If there's a huge winter storm, an easy comparison won't save you from posting a bad result for the quarter. It's good to keep this in mind though when you're building up a case for why you believe an upcoming quarter will be good or bad for a company.
Other things that can affect comps:
Closed stores: When retailers close stores, they get a temporary comp boost at nearby stores. The benefit comes as traffic that would normally go to the closed store gets rerouted to other nearby stores. Imagine your nearby Home Depot store closing down. Where would you go instead? Some of us would go to the next closest store, which might be a Lowe's or another home improvement store. Others might decide to go to the next nearest Home Depot. So while you might see a decline in sales at Home Depot, you'd actually get a boost in comps because 1) the closed store is removed from the stores in the comp base, and 2) several other existing Home Depot stores get a boost in sales from the closed stores. So for retailers like Staples that are closing a good portion of their store base, they might actually get a comp benefit that would optically benefit the stock.
Store remodels: For some retailers, remodeling stores can have a large impact on comps. If the remodel was done during store hours, the construction can be disruptive and slow sales. If done offline and with drastic improvements, the remodel can help boost comps. Examples of companies that have had recent remodels include Pier 1 and Big Lots.