Many investors that play the retail sector live and die on same store sales figures, and use these as one of the main indicators of performance by companies in the sector. There are several reasons why it might be better if retailers stopped releasing these reports and promoted other measures to gauge performance.
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The most obvious reason why retailers should stop reporting monthly sales is that the measure is incredibly short term in nature and thus difficult to use to make any conclusions about the company. Can you imagine the chaos that would result if you had to report earnings every month?
Monthly same store sales reports encourage deviant behavior by managements that are eager to meet the guidance and expectations that investors have on these figures. The management team should instead be making decisions that are best for the long term interests of the company and should not be focused on a short term measure reported monthly.
One game that retailers play is to get promotional on retail prices to help boost the top line for the company. While this may help the company meet same store sales guidance, it may also lower profitability and impact the brand that the company has been trying to build.
Growth Is Overrated
The attention focused on same store sales growth from month to month by investors also implies that growth is necessary for a retailer to be a successful company or investment. This is not necessarily true as growth at the expense of profitability usually ends badly in the long term, with too much leverage and a death spiral for the company.
Reporting same store sales monthly also distracts management from other more important tasks as they spend a considerable amount of time trying to explain away a negative report. It's always the weather that caused the decline or a tough comparable that the company was up against.
Same store sales reports also don't encompass the entirety of the company, as the measure often doesn't contain any direct to consumer or internet sales for retailers, which are becoming a growing part of revenue for many companies. In the most recent quarter, Abercrombie & Fitch (NYSE:ANF) reported that direct to consumer sales increased 52% to $99.5 million. Urban Outfitters (Nasdaq:URBN) also reported a large increase in these types of sales, with direct to consumer sales up 28% for the two month period ending December 31, 2010.
The Bottom Line
Perhaps other retailers should follow the example of some of the largest retailers in the United States. Wal-Mart (NYSE:WMT) stopped reporting monthly sales to investors in May 2009. Macy's (NYSE:M) did the same starting in 2008, but later reversed its decision and started reporting them again before the year ended.
Investors and analysts seem to think that same store sales is the best method of appraising a retailer. The real truth is that the measure is short term and tends to encourage behavior by management that is not in the long term interests of the company. (To dig deeper about retail stocks, see Analyzing Retail Stocks.)
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