Why You Shouldn't Hang Your Hat on Retail 'Comps' - TheStreet

Monthly same-store sales comparisons have long been reported by department stores and mall-based retailers, and the Street has come to depend and trade on them. Looked at alone, what do they say about the overall health of an individual company? Not much, many analysts believe.

Analysts don't dispute that the monthly reports have their merits. They can indicate customer loyalty, market-share gains and price levels at individual companies, help predict changing revenue trends and show the health of older stores.

Same-store sales reports, which can be traced back to at least the 1960s but came to be a focal point on Wall Street in the mid-1980s, are most commonly released by clothes retailers. They compare sales at stores open at least a year with the prior year's results.

But the "comp-store" reports are close to useless in predicting earnings or macroeconomic trends, according to Richard Hastings, retail sector analyst at Bernard Sands. "It's a way of taking a small amount of data and trying to make something out of it. It's not an accurate indicator of mass consumer spending."

For one thing, the results can be misleading. Take

Abercrombie & Fitch

(ANF) - Get Report

: The company has reported positive comps in only two of the last 31 months, yet has seen its profit increase.

In its latest quarter, same-store sales were negative in all three months (an average 9% drop), but earnings per share rose 6%. Analysts say the company has had higher inventory markups and has been able to control costs well. This has contributed to operating margins of about 19% to 20%, among the highest in the industry, according to Sun Trust analyst Dennis Van Zelfden.

The correlation was a little better at

Gap

(GPS) - Get Report

, which reported negative same-store sales each month from May 2000 through July 2002, and had equally weak quarterly results. Gap reported flat sales from 2000 to 2001, while its results fell to a loss of about $8 million in 2001 from a profit of $877 million in 2000.

There are also problems with the accuracy of monthly same-store sales data. First, promotions and markdowns can skew them, said Craig Johnson, president of New Canaan, Conn.-based retail consulting firm Customer Growth Strategies.

The weather and the effects of store closures, relocations and refurbishes also make comparisons less meaningful. There is also no standard way all retailers compile the data, and end dates can vary among companies.

Thus, the room for manipulation and misrepresentation in same-store sales figures is huge. "It's a self-fulfilling prophecy," Johnson said. "You can't play that

manipulation game with total sales or total operating margins. Those are much more reliable indicators."

Tom Goetzinger, a retail stock analyst for Morningstar, argues the whole tradition is a smokescreen. "It's a lot of noise. It's a lot of clutter. We're always digging for more and more numbers," he said. "To a certain extent, you start bombarding investors with circumstantial information."

Said Johnson: "To hang your hat on same-store sales the way Wall Street does, it's a mystery to me."

Not every retail sector reports same-store sales. Home improvement companies like

Home Depot

(HD) - Get Report

and

Lowe's

(LOW) - Get Report

and office equipment suppliers like

Office Depot

(ODP) - Get Report

and

Staples

(SPLS)

don't bother. A Staples spokeswoman said reporting monthly same-store sales "could be misleading, as the numbers would not be as relevant or useful."

Michael Niemira, chief economist and director of research at the International Council of Shopping Centers, an industry trade group, has long believed that more monthly data than same-store sales are needed to evaluate a retailer's financial health. He noted that in the last two years, the retail story has really centered on profit, not sales.

Niemira, who was formerly a senior economist at the Bank of Tokyo-Mitsubishi, took the matter into his own hands and in September 2002 helped create the Retail Executive Opinion survey, a joint project with the Washington-based retail trade association National Retail Federation and BTM.

The survey collects the opinions of industry executives on trends in merchandising, hiring, sales expectations, customer traffic and special seasonal-related developments. It is conducted each month, and as results have accumulated, they have been used to develop an aggregated index of industry trends.

The survey's Retail Sector Performance Index (RSPI) measures retail executives' evaluations of monthly sales, customer traffic, the average transaction per customer, employment and inventories, and offers a six-month-ahead sales outlook expectation. The RSPI is based on a scale of 0% to 100%, with 50% equaling normal, or unchanged. A reading below 50% signals deterioration, while above 50% implies an improvement in industry conditions.

In November, for example, the RSPI was 52.1%, compared to 56.9% in October. By contrast, in its first month, September 2002, the RSPI was at 40.9% and dropped to 39.5% the following month. The survey hit its lowest point in January, when it reached 31.9%, compared to December 2002's 44.6%, reflecting the then weaker-than-expected holiday shopping season.

The Retail Executive Opinion survey is done anonymously across all retail sectors and company sizes, according to a NRF spokesperson. It also measures operations, or the average of employment and inventories, current demand, or the average of sales and traffic, and the industry's discounting, or pricing power.

Response to the survey has been favorable, the spokesperson said. Because it is done anonymously, executives feel the results are accurate and lack pretense.