10/12/05
It seemed like there might have been some confusion about Same Store Sales
(“SSS”) during my presentation [I pitched CC to the hedge fund club on
campus]. Hopefully these bullet points will help clarify things and help
others understand the concept behind SSS (or "comps") when they read about
them or hear about them on CNBC
On SSS:
*In a retail company, loosely speaking, revenue grows by
(growth of the store base + growth of sales at existing stores), aka “same
store sales.” (ie: if you have 100 stores and they increase sales by 5% next
year and you increase the store base by 5 stores then you should expect a
revenue increase of approximately 5% + 5% = 10%). Timing is affected by when
within the year the stores open, etc… but roughly speaking, this is how
retail operations are modeled.
*SSS are important because they are helpful in
understanding the leverage that a company may have over fixed portions of
expenses. Arguably, one individual circuit city location probably costs
about the same to run this year as last year- maybe the operating costs are
slightly higher from wage inflation or lower based on IT system
improvements, but overall, they are about the same. Hence, if you can sell
10% more from the same more-or-less fixed-cost building, more of that falls
to the bottom line than falls to the bottom line when you are reporting
negative SSS and just covering your overhead costs.
*The best way to evaluate SSS is to look at them in terms
of their 2 year average. For example, you may see a company in the news for
reporting SSS of +10%. However, that number is not impressive if the prior
year they reported SSS of -10% for that same period. All that +10% tells you
is that in two years, their total increase in sales was approximately 0% (ie:
10% + (-10%) = 0%). Thus, a +3% comp on top of an earlier +3% comp is more
impressive than a +10% on top of a -10%, because your 2-year average SSS is
+3% in the first case and +0% in the second.
How SSS Relate To CC:
*To return to Circuit City, I held the 2-year average
constant from what they displayed last quarter, when they reported +5.1% SSS
against a tough comparison of +2.9% last year (2 year average = (5.1 +
2.9)/2 = 4.0%). If they are able to hold this 2-year average at around
+4.0%, over the next 2 quarters, they have the potential to report SSS in
the upper single digits or possibly low double digits.
*Someone asked about how this compares to revenue expectations
on the street. For the next 2 quarters, consensus estimates are for revenue
growth of approximately 6% each quarter, based on approximately +4% SSS and
+2% growth in the store base…
*Hence, if I am right, we get SSS growth of, say, 8-10% and
store base growth of 2% giving us revenue growth of 10-12%, a decent amount
of which will ideally fall to the bottom line since many “fixed costs” have
already been covered… and a higher number than Wall Street is expecting…
hopefully this helps catalyze the stock to move higher and turn more people
on to the turnaround story here.