I have started a series of posts on understanding financial statements. This is because I have received questions from readers asking whether there is a need to have a financial background in order to analyse annual reports/financial reports.
I did not receive any formal finance or accountancy training. The only course I took was a Accountancy 101 module during my university days. The only advantage I have over those with zero knowledge is understanding terms like “account receivables” and “cost of goods sold”. These can also be learnt online. So that means that you do not have to be an accountant to do the same research that I’m doing.
In this post, I will be going through the concept of “Same Store Sales”.
What is Same-Store Sales?
Same-Store Sales, or Comparable-Store Sales, is a measure of sales growth from a company’s existing stores. Looking at the sales made for retail locations that have been open for a year or more, the same-store sales figure allows investors to compare the performance of established stores over time.
Same-Store Sales is relevant to businesses who are spread out across several different locations. Think store chains like Sheng Siong, Dairy Farm etc. Or restaurant chains like Sakae, Soup Restaurant and RE&S.
At businesses like these, sales growth can come from two sources.
1) Better performance at existing stores. This might come from higher sales volume or price increases.
2) Newly opened stores that expand the market reach by serving new customers.
What Same-Store Sales does is to measure the impact of (1) while excluding (2).
Calculating Same-Store Sales may seem straightforward, but keep in mind that Same-Store Sales is not a “GAAP” quantity. Different companies have their way own methods of deriving Same-Store Sales numbers. Investors need to know how the company calculated its SSS numbers.
What if a store was shut down for 3 months due to renovations? Or if a store was open only for 4 months last year?
Let’s use Sheng Siong’s latest financials as example.
In Sheng Siong’s case, they only include stores opened before FY2019 in their Same-Store Sales calculations. This is fair in my opinion as these stores are active at least a year or more.
Why Does Same-Store Sales Matter?
Why does Same-Store Sales matter? An increase in a dollar of sales is still an increase in dollar of revenue. Why should it matter whether that dollar came from an existing store or a newly opened store?
In terms of revenue, it doesn’t. the impact of a “SSS” dollar or a “New store” dollar to the company’s top line is the same. However, a larger portion of the “Same-Store Sales” dollar is more likely to flow through to the bottom line.
Each store in a retail/restaurant chain usually has these significant costs.
1) Fixed PPE depreciation cost
2) Expenses to run the business (eg. Rental, electricity, wages etc)
3) Cost of goods sold (COGS)
COGS is a variable cost which will rise in proportion to sales.
Except for COGS, the 2 above are more or less fixed costs that have to be incurred as long as the store stays open. Even if the store does not make anything in sales.
Case Study – Sheng Siong Group Ltd (SGX:OV8)
Sheng Siong Group Ltd has the third largest chain of supermarkets in Singapore. Let’s take a look at how an increase in Same-Store Sales affect’s Sheng Siong’s financial results.
For FY2019, Sheng Siong’s revenue grew by 11.3% and net profit grew only 8.5%. Net profit margin is consistent at around 9.5%.
Most of the revenue growth is due to the opening of new stores. CSSS is flat at 0.1%.
Now let’s compare this with 3Q20 results.
Revenue grew by 44.6% for the first 9 months of FY2020. Net profit increase by a whopping 81.1%. I attribute this set of great results to the Great Toilet Paper Rush 2020.
Net profit margins increased from 9.5% to almost 12%.
The main difference between FY2019 and FY2020 is that the revenue growth in 2020 mainly comes from Same-Store Sales. This shows that Same-Store Sales growth usually comes with significant operating leverage, whereas sales growth via opening new stores does not usually create significant operating leverage.
This is why Same-Store Sales growth is considered a key metric for retail and restaurant chains. It is because of the operating leverage that usually accompanies it.
That is not all. Net income generated via Same-Store Sales growth usually leads to an increase in operating cash flow. This cash generated can be distributed to shareholders via dividends or share buybacks.
(Disclaimer: Provided the company is efficient at managing their working capital)
If a chain can only grow by opening new stores, much of the net income goes to cover the upfront costs associated with new stores opening. This becomes “retained earnings” and is not available to be distributed to shareholders.
This is also how Sheng Siong is able to increase their interim dividend by 100% in 1H20. They had an increase in SSS sales of 40% in 1H20. This leads to a huge influx of cash generated from operating activities.
Same-Store Sales growth usually leads to operating leverage and capital lightness. Ie. Increased profits without incurring additional expenses associated with expanding/opening new stores.
A friend of mine working in retail once told me that SSS growth is important as
- Most new locations do much better in their first year than the following years
- New stores close to existing stores might cannibalize old stores, leading to decrease in net margins.
In order to convince the market that a particular business is doing well, they must prove that they can open stores in new locations and also capture market share (SSS growth) from existing outlets/stores.