Rebel Traders - Stock Market and Economic Analysis

This morning various retailers reported same store sales figures for the March reporting period. Many companies released figures that were better than analysts were expecting, sending Bill Pissani of CNBC into an orgasmic frenzy.

What is same store sales?

Same-store sales is a business term which refers to the differential in revenue generated by a retail chain’s existing outlets over a certain period of time, compared to an identical period in the past, usually the previous year. By comparing sales data from existing outlets (that is, by excluding new outlets), the comparison is like-to-like, and avoids comparing data that are fundamentally incomparable. This data is expressed as a percentage.

So lets take that explanation of same store sales and simplify it even further. If I run a store that sells nothing but batteries, and my store has been open for 20 years, I will need to sell more batteries every year than the prior year in order to show a growing revenue and profit line.

If my business is successful, and I get more customers year after year, then my same store sales figures will rise accordingly. But what happens if suddenly I start losing customers, and the decreasing sales becomes severe. Lets say that at the peek of my business I was selling $20,000 worth of batteries in a given month. But when people stop coming into my store my sales drop all the way down to $2,000 a month a year later, a substantial decline.

Now things turnaround for my battery store, customers start returning, and a year later I’m selling $10,000 worth of batteries per month. I am now able to report my same store sales for the month as a 400% increase! Sounds great doesn’t it, or is it?

I go home and tell my wife that the store had a 400% increase in same store sales. She gets all excited and makes me my favorite chicken dinner. But what I did not tell her is that even after a whopping 400% increase in sales from one year ago, The store is still selling 50% less than what I was selling at the peak. I’ll wait until after my coffee and apple pie to to her that part of the news.

You see, same store sales is only a measure of how conditions exist at the time compared to one year earlier. If one year ago sales were in the gutter than it does not take much of an improvement to create a big percentage increase in sales. The hoopla exhibited today in the media over the sales figures is misplaced.

How about a real example this time. We’ll take Limited Brands (LTD). This morning they reported a whopping 15% increase in same store sales compared to the same period one year ago. The chart shown below is the stock price (red) plotted along with the same store sales 12 month moving average (black). Why a moving average? As the data is reported in a year over year comparison, and the data on the chart is in a monthly increment, than the 12 month moving average will provide a clear representation of sales data.

Observe that the share price of Limited Brands (LTD) is almost back to its peak reached in late 2006. But, the same store sales data is still 1/2 of what it was at the peak. In other words, I’m still only selling half of the batteries I used to.

(click image for full size)

Now you can see why LTD has a high short interest, currently sitting around 6% to 8%.