Same Store Sales Growth
For the fundamental investor there may be no more important number than same store sales growth. In the coming months we’ll be sure to hear a lot about the same store sales data when holiday shopping numbers are digested, and with it we’ll see a number of stocks soar and plunge. You should pay attention to same store sales growth, too.
What makes same store sales grow?
Same store sales growth shows that a company is meeting one or many of the following criteria:
1) Gaining marketshare
2) Improving its profit margins (usually a consequence to growing marketshare)
3) In a naturally growing industry
Why same store sales growth is important
Ignoring the obvious fact that growing same store sales growth means usually greater profitability, there are some very important fringe benefits to growth.
Let’s consider the case of a small business that sells cookies. Each batch of cookies costs $1 in materials, and $1 in labor. You have fixed costs of $2000 per month for rent. (I’m keeping this very, very simple). Each batch sells for $3 each.
If you were to sell 3500 batches per month, you would generate revenues of $10,500 and have costs of $9,000 for a profit of $1,500 per month. Now, imagine if you had same store sales growth of 10%. You would now sell 3850 batches at a cost of $9700 and generate revenues of $11,550. Your profit would be $1,850 per month. All told, profits increased by 23% from a 10% increase in same store sales. That’s what we like to see!
Where same store sales go wrong
Same store sales growth should be met with a change in profit margin greater than the change in same store sales. If they aren’t, what we have is nothing more than a cost cutting scheme.
