What Are Comps?
The term comps (short for comparables) carries different meanings depending on the industry and context, but entails a comparison of financial metrics and other factors to quantify performance or determine valuation.
In retail, it refers to a company's same-store sales compared to the previous year or a similar store. Similarly, in financial analysis, comps is short for 'comparable company analysis,' which is a relative value technique used to assign a value to a business based on the valuation metrics of a peer. In real estate, comps are used in assigning a value to a property by comparing it to similar, neighboring properties. While similar, real estate comps are different than appraisals.
Understanding Comps: Retail Example
When used to gauge the performance of retail operations, comps is used in the context of comparable same-store sales. This comps metric is used by analysts and investors to determine what portion of sales growth is attributed to old stores compared to new stores. Some large retail chains release comps monthly. In this context, such comps compare a company's revenue growth to sales created by stores that have been open for at least one year.
Stores that have been open for less than one year are new stores. New stores typically experience high growth rates for several reasons, including promotions, increased interest from launches, and grand openings.
Comps not only provide investors and analysts with important information about the financial health of a company, but they also help retailers assess how well their existing stores perform against other locations.
Alternatively, new store sales may be less than projected due to poor marketing, inadequate advertising, and lackluster promotions. As a result, including new stores in the growth rate calculation for an entire retail chain can supply inaccurate growth rate results. Because the comps metric only compares results for stores that are older than one year, it gives a better indication of true growth for the overall firm.
Analysts typically like to hear that a company's comps are rising each period. This is a good indication that a company's consumers are willing to pay more for its goods compared to the previous period, and/or they are willing to come to the store more often and spend about the same amount.
Calculating and Using Retail Sales Comps
To calculate a company's sales growth rate, subtract the previous year's sales from the current year's sales and then divide the difference by the previous year. For example, if company A earned $2 million in revenues last year and $4 million this year, the calculation to determine its growth rate is $4 million minus $2 million, divided by $2 million, or 100%.
- Not including new stores in comps removes extraneous factors, such as grand opening promotions, that may skew results.
- Comps are valuable metrics used by retailers to identify the profitability of a current store.
An inquisitive investor digs deeper and asks how much of the growth was due to new stores compared to old stores. They discover that new stores generated $3 million of the current year's sales and stores open for one or more years generated only $1 million of sales.
To calculate comp sales, the investor does not include sales from new stores. The new calculation is $1 million, minus $2 million, divided by $2 million, or -50%. When comp store sales are up, the company's sales are increasing at its current stores. When total sales growth is up and comp stores are down, the company is generating most of its revenue from the opening of new stores to maintain growth, which could be a sign of turmoil.
Comps: Business Valuation Method
Comps in the context of a comparable company analysis will utilize a ratio based on a value metric such as market capitalization or enterprise value (EV) compared to a performance metric, such as sales, EBITDA, or earnings/earnings per share. A determination on performance can be made under the assumption that companies that as similar should trade at similar multiples.
Business Valuation Comps Uses
Such financial analysis comps are especially valuable when determining the fair market value (FMV) of a business. They can be used to formulate an asking or offer price in an acquisition or sale, or in the case of a dispute between partners or during a buyout. Such comps may also be used in legal or tax disputes when justifying a valuation is necessary.
One common example of using comps to determine fair market value of a business entails taking the price to gross revenues multiple and multiplying that figure by the business revenue figure. Software is available that helps individuals perform these comparisons.
Example of Comps: Real Estate Pricing
In real estate, determining comps entails the comparison of properties that possess the same or similar characteristics, such as size, age, location, and other metrics. Real estate comps can be performed by a real estate agent utilizing market analysis, or by an appraiser or surveyor that may be licensed or certified.
Real Estate Comps Factors
Factors that are usually employed in real estate valuation include market conditions, such as changes in price over time, as well as conditions of sale, such as whether the property last sold as a distress sale or an estate settlement or other factor that could affect its value. Other factors include locational and physical comparabilities, such as when properties are located near one another and are similar in age, form, condition, and size.
Real Estate Comps Accuracy
Property owners or buyers should be aware that some comps may not especially representative of the value of a home. Some comps may be too dated/do not represent a fast-changing marketplace, or may cite properties that are too far away or still on the market. Some comps may actually be appraisals, which utilize a strict formula based on square footage or number of rooms, rather than opinions on desirability, quality, or even what is known as the 'charm factor.' Apartment owners and owners of houses that have a wide variety of luxury and/or inexpensive properties nearby may find that their comps do not represent their property. A good real estate agent should be able to provide applicable information on relevant comps.