Image Source: The Motley Fool.
Continue Reading Below
The financial metric same-store sales, also known as comparable-store sales, refers to the sales of a company's locations that have been in business for at least one year. This calculation helps analysts determine how much of a company's growth is due to actual sales growth in the company's stores or locations, as opposed to expansion.
Definition of same-store sales
As companies expand, there are two main sources of revenue growth they can produce. There's growth through expansion -- for example, if a retail chain goes from 20 locations to 40 locations, it can roughly expect to double its revenue.
There's also same-store sales growth. This refers to the change in sales volume from the company's pre-existing locations. Generally, this is quoted on an annual basis. For example, if that retailer who doubled its stores reports same-store sales growth of 3%, this means that the 20 stores that were already in operation collectively grew their sales by 3%.
Same-store sales growth can be due to higher sales volume or price increases, and it's also important to point out that same-store sales is a collective measurement. It doesn't tell us anything about how a company's individual locations are doing, or if one region is performing particularly strong while others are lagging.
Continue Reading Below
Same-store sales are most commonly used by retailers (hence the word "stores"), but can be applied to other businesses, as well. For example, REITs often use same-store sales to show how much their rental income from existing properties improved over the past year.
Why it's useful
Same-store sales can be useful to know because it tells investors whether a company is actually growing in popularity or improving its pricing power, or if it's simply growing its sales by opening more and more stores.
For instance, one rapidly growing retail chain may report revenue growth of 20%, but if same-store sales were flat for the year, it doesn't necessarily mean that the business is doing well. On the other hand, if another retailer reports 10% annual sales growth, but says that same-store sales improved by 7%, it could be more encouraging to investors, even though total sales only grew by half the amount of the first retailer.
For a real-world example of this, let's take a look at Panera Bread's (NASDAQ: PNRA) year-end results from 2015. The company and its franchisees opened a total of 112 new bakery-cafes during the year, a 6% increase from the previous year.
Panera's total revenue grew by about 5.8% for the year, but the company's same-store sales only grew by 1.9%. The remaining growth was due to new stores opening up throughout the year.
Now, don't get me wrong: 1.9% same-store sales growth isn't necessarily bad at all. Rather, the point is that 1.9% is a completely different number than almost 6% when it comes to growth, so it's important to be able to identify what each of those percentages are referring to.
The bottom line on same-store sales
Like all financial metrics, same-store sales should be used as part of a well-rounded analysis, taking into account all of the available facts. Same-store sales can be useful for determining whether or not demand for a company's product is still growing. When combined with valuation metrics, this can help investors determine whether the stock of a growing company is cheap or expensive.
A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early-in-the-know investors! To be one of them, just click here.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.