Like for like sales
When investors want to compare sales volume/revenue with this period to a prior similar period to analyse the true underlying growth/decline, they will compare like-for-like sales which is a method of trying to remove any factors in this period that will distort the comparison such as expansion, acquisition, one-off items, new products that have come out this year, fx moves or any other event that artificially enlarge a company’s sales.
Like-for-like sales help companies and investors determine the sales performance over a certain period of time when compared to the same period of time one year earlier, such as comparing the second quarter of 2015 to the second quarter of 2016. Like-for-like sales are typically represented as percentage growth rates eg. A 10% increase in LFL sales
- Bob had scarves, hats and coats in 2Q15 and operated 20 stores
- In 2Q16 he had scarves, hats, coats and shoes and operated 18 stores
- To do a LFL we would ignore the 2 stores that closed and his new range of shoes to make the comparison in sales.
Comps (comparables)/ Comparable store sales/ Same-store sales (an example of LFL figures)
Stores that have been open for less than a year are referred to as new stores. New stores have high growth rates. As a result, the growth rate of all stores is higher than the growth rate of comparable stores (operating for longer than a year) as long as the company is adding new stores, so to reduce any chance of inflating the reported growth rates – companies remove the effect from new stores when reporting comps. We exclude new stores because they’re growing from a base of 0, and will make overall sales growth look abnormally high.
Analysts want to hear that company’s comps are rising each period because it shows that same existing store sales are rising on the prior period because consumers are wanting to buy more this year from the same stores or the brand is more popular, without the need for any opening of new stores.
The key for the company is to see an increase in revenue without resorting to opening new stores. When total sales growth is up and comp stores are down, it means the company is relying on the opening of new stores to maintain growth. This is not a good sign.
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.
A base year is the first of a series of years in an economic or financial index.
Growth analysis is a commonly used way to describe company performance, especially for sales. If company A grows sales from $100,000 to $140,000, it means the company increased sales by 40%, where $100,000 represents the base year value.
In the calculation of comp store sales, the base year represents the starting point for the number of stores and the amount of sales those stores generated.
- For instance, if company A has 100 stores that sold $100,000 last year, it means that each store sold $10,000. This is the base year. In this way, the base year determines the base sales and the base number of stores.
- In the following year, the company makes $140,000.
This comes from;
- company A opening 100 more stores who generate $50,000
- existing same-store sales decline in value by 10%, from $100,000 to $90,000.
The company can report a 40% growth in sales from $100,000 to $140,000, but savvy analysts are more interested in the 10% decline in same-store sales.
Easy/Softer Comps and their significance
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.
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. 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.
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.