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TO COMP OR NOT TO COMP

Are same-store sales still a valid measurement of a retailer’s health?

By Joel Groover

Analysts often take the pulse of a retail chain by asking a seemingly simple question: How robust are sales at stores it has run for at least one year?

The resulting metric — comparable-store sales, or “comps” — is so well established that it is part of the retail industry vernacular as both a noun and a verb. Retailers “comp up” if they manage to beat the previous year’s comps. When they make unhappy headlines by comping down, shareholders get antsy and CEOs get defensive.

Some industry veterans regard comps with a respect that borders on affection. “Over the years, the retailers that have remained healthy almost without exception are those that have achieved great comp-store sales growth,” said Howard L. Davidowitz, chairman of Davidowitz & Associates, a New York City-based retail consulting and investment banking firm. “You do not see anybody continue for more than two years with negative comp-store sales and still be successful. It has never happened.”

And yet some of retail’s heaviest hitters are raising questions about this trusted diagnostic tool — or at least the stock put in it by analysts, investors and the press.

Edward S. Lampert, chairman of Sears Holdings Corp. (the merged entity of Kmart Corp. and Sears, Roebuck and Co.), has largely dismissed comps in pursuit of cash flow, notes Neil Stern, a senior partner of McMillan|Doolittle, a Chicago-based retail consulting firm. “Kmart is comping down 10 percent to 15 percent in the couple of years that he has owned it, but it has actually made money,” Stern said. “It has more cash flow and has cut advertising, raised margins and almost purposefully lost sales.”

Lampert “is trying to get the Wall Street community to look at a different metric,” Stern said. “Maybe 10 years from now, we’ll start to obsess about cash flow, but right now we all look at comps.”

Wal-Mart CEO H. Lee Scott Jr. is waging a similar campaign. In recent conference calls, he has urged analysts to look beyond comps, also known as same-store sales, when judging Wal-Mart’s performance. Marty Heires, a Wal-Mart spokesman, said, “Because of the way we grow, a total reliance on same-store sales provides a false indication of how well the company is doing.” Indeed, Wal-Mart’s growth strategy harms same-store sales with what might be construed as malice aforethought. At the highest-volume Wal-Mart Supercenters, the rapid turnover of merchandise and the sheer numbers of cars and people can threaten to ruin the shopping experience. In a bid to eliminate long checkout lines, make parking easier and keep stores clean and orderly, Wal-Mart increasingly operates multiple stores in the same trade area, Heires says. This might lower comps in the short term, he adds, but it enables Wal-Mart to boost overall sales and maintain customer loyalty in the long term.

The strategy has another advantage, says Davidowitz. “When Wal-Mart builds a second or third Supercenter, nobody — not Kroger, not even Target — is able to come in,” he said. “Wal-Mart owns the market.”

Wal-Mart’s plan might appear idiosyncratic, but any expanding retailer seeking rapid gains in market share (Starbucks, anyone?) could intentionally “cannibalize” existing stores in the same way and suffer a hit in comp-store sales.

“Maybe you had only one store in a market doing $50 million, and now you have three doing a total of $100 million,” said Stern. “You’ve doubled your sales in that market. But from a Wall Street standpoint, you’re producing a negative comp. That’s the frustration some retailers feel when they say, ‘You guys are missing the big picture here.’ ”

Those who view retail performance solely through a same-store lens can miss that big picture in other ways as well.

A chain could pump up its comps, for example, by making across-the-board markdowns and tripling its ad budget. The temporary pop might impress Wall Street even as it undermines the retailer’s margins (sales minus costs), and, ultimately, its earnings. “If you let comp-store sales guide your business decisions, you will have a very short focus, and that could create problems,” said Michael P. McCarty, senior vice president of research and corporate communications at Simon Property Group.

And though the Securities and Exchange Commission closely monitors accounting practices for standardized metrics such as earnings per share, retailers are free to define comps in self-serving ways. “It is not a GAAP [generally accepted accounting principle], so they can say, ‘That’s just the way we do it here,’ ” Stern said. “If I expand my store by 50,000 square feet, is that a comp or not? Well, if I want to impress Wall Street, I’ll say it is a comp. So the store comps up 25 percent, but I have cheated.”

Likewise, if a retailer moves an old store across the street, should its sales be added to the same-store tally, or is the location “new”? The answer is up to the individual chain. In fact, accounting methods for comps sometimes vary wildly even within the same company. Stern recalls working with an international retail client for which the problem was particularly pronounced. “In 65 countries, it had 50 different ways of reporting same-store sales,” he said. “Brazil reported a comp differently than Germany.”

Ever-changing market dynamics add another layer of complexity, says General Growth Properties CEO John L. Bucksbaum, SCSM. “Maybe a retailer had a huge success in a given year — it hit the ball out of the park every time it changed its merchandise, or the movies that year were just flat-out better,” he said. “It might not be sustainable to expect [the retailer] to continue to register those very strong numbers.”

When evaluating the health of their tenants, Simon, General Growth and others certainly pay attention to national and property-specific comp-store sales. They take care, however, “to look underneath those numbers at what management has been doing with its capital expenditures,” said McCarty. “You have to look at how it has been husbanding the long-term growth of the company.”

Such key information might be absent from an analyst’s one-page retail report or a reporter’s three-paragraph news brief titled “Gap’s Same-Store Sales Down 8 Percent.” “Outside pressures force the analysis to be simplified at times,” McCarty said. “To be time-efficient, many analysts and even some investors try to reduce their opinion to one number, and that is what you have to guard against.”

All of that said, though, given the option of taking only one number with them to the proverbial desert island, many on Wall Street might well choose comps.

At its best, the metric acts as a kind of core sample of a retailer’s store base. Because it ignores temporary sales upticks caused by heavily promoted new stores — or by a rash of acquisitions — the gauge discourages chains from chasing growth for growth’s sake and encourages them to keep old stores in good shape, says Ken Perkins, president of Retail Metrics, a Swampscott, Mass.-based research firm. “It is not a perfect metric, but it is a very good one,” he said. “It can give you a real sense of how organic the growth is in a retailer.”

Furthermore, Perkins says, same-store sales have proved to be an excellent indicator of long-term success; solid comps tend to translate into solid earnings over time.

Whatever the caveats and complexities, that simple adage is something Wall Street can ill afford to ignore. Comping appears to be here to stay. n