1/

Get a cup of coffee.

In this thread, I'll help you understand Same Store Sales (SSS), and why it's such an important metric for retailers.
2/

SSS comes into play whenever we have a company whose business is spread out across several different locations.

Think store chains -- Home Depot, Costco, Target, Walmart, Dollar General, etc.

Or restaurant chains -- Starbucks, Chipotle, etc.
3/

So, what exactly is SSS?

In simple terms, it's just a comparison.

We *compare* the sales made by a bunch of stores this year -- versus the sales made by the same (or a similar) bunch of stores last year.
4/

At a chain, sales growth can come from two sources:

a) Better performance (higher volumes, price increases) at *existing stores*, and

b) *New stores* that expand the market and serve new customers.

SSS tries to measure the impact of a) while *excluding* the impact of b).
5/

Let's break this down a bit.

Suppose we have a chain of hardware stores -- ABC Hardware. The chain had 100 stores last year.

Chains like this are always optimizing their "store footprint". Always opening new stores, closing down underperforming stores, etc.
6/

So let's say, over the past 1 year, ABC Hardware opened 10 new stores, and closed down 5 underperforming stores. So now, they have 100 + 10 - 5 = 105 stores.

Here's a fancy Venn Diagram showing both last years' and this years' stores: Image
7/

As the Venn Diagram above shows, there were 95 stores in the chain that were open for business both last year *and* this year.

These 95 stores form our "same store base".

To get Same Store Sales (SSS), we compare the sales made by these 95 stores -- last year vs this year.
8/

For example, suppose these 95 stores together made $100M in sales last year, and $110M this year.

Then, we can say that our SSS grew 10%.
9/

Given this description, calculating SSS may seem like a fairly straightforward thing.

But there are a few "finer points" to consider.

For example, what if a store was open for only 3 months last year, but for all 12 months this year?
10/

What if a store was open all 12 months both years, but a big section of the store was closed for remodeling during the holiday season this year?

What if a store was shut down for part of this year due to Covid-19?
11/

SSS can be a very useful metric for a retail chain, but it's not a "GAAP" quantity.

So, companies that report SSS figures often make judgment calls to answer these kinds of questions -- and hence decide what exactly gets included in (and excluded from) SSS calculations.
12/

That's why it's a good idea to read the footnotes in the 10-K: they often provide a reasonably precise description of how the company calculated its reported SSS numbers.

For example, here are snippets from Starbucks's and Home Depot's 10-Ks: ImageImage
13/

So, why does SSS matter?

After all, an extra dollar of sales is an extra dollar of sales, right?

Why should it matter whether that dollar came from an existing store or a newly opened store?
14/

The answer is:

The *top line* (revenue) impact of that extra dollar is indeed exactly the same -- whether it's an "SSS dollar" or a "new store" dollar.

But if it's an SSS dollar, a much bigger portion of it is likely to flow through to the *bottom line* (net income).
15/

Why?

Because each store in a retail/restaurant chain usually has significant *fixed costs*.

Let's think about the "per store economics" of such a chain.
16/

First, setting up a store usually involves a big upfront cost.

This includes everything from constructing the store, furnishing it, setting it up for handling incoming truckloads of goods, installing corporate IT, etc.

Say all these expenses come to ~$3M per store.
17/

This ~$3M cash outflow occurs before the store makes its first dollar of sales.

But it's usually not expensed right away in the company's financials.

Instead, it's *depreciated* over the life of the store's assets -- over 10 years or so.

For more:
18/

Thus, every store has a more or less fixed depreciation cost per year -- amounting to ~$300K per year (~$3M over ~10 years).

This is a non-cash expense, but for retailers it's usually a very real cost -- stores have to be constantly maintained/renovated.
19/

Once the store opens for business, there are other fixed costs.

Rent. Electricity. Insurance. Security. A big part of employees' wages.

These are all more or less fixed costs that have to be incurred as long as the store stays open -- even if it makes $0 in sales.
20/

Let's say all these fixed costs together come to ~$1M per store per year.

On top of this, there's variable costs that rise in proportion to sales.

A good example is Cost Of Goods Sold (COGS). If gross margins remain roughly constant, COGS grows in proportion to sales.
21/

Also, some employee bonuses may be tied to sales. In some stores, a portion of the monthly rent may depend on sales as well. These are also variable costs.

All inclusive, let's say variable costs come to ~50% of sales.
22/

So, if a store's annual sales (revenue) is $R, its operating profits will be about "50% of $R, minus $1M".

Calculations: Image
23/

Now we can understand why $1 of SSS growth usually ends up contributing much more to the bottom line than $1 of sales from a new store.

Let's say our chain has 100 stores.

And let's say each store did $3M in sales last year.
24/

Neglecting corporate overhead, and assuming a 25% tax rate, that works out to ~37.5M in net income for the whole chain.

Calculations: Image
25/

Now, suppose the chain grew sales by 7% this year, and *all* of this growth came from SSS growth.

Then, this *7%* sales growth (top line) leads to a *21%* net income growth (bottom line).

In other words, SSS growth usually comes with significant operating leverage. Image
26/

But what if the 7% sales growth came from opening new stores instead of SSS growth?

In this case, our *7%* sales growth only creates the same *7%* net income growth.

Sales growth via opening new stores does not usually create significant operating leverage. Image
27/

This is why SSS growth is such a key metric for retail and restaurant chains; it's because of the operating leverage that usually accompanies it.

But wait. It gets even better.
28/

Net income generated via SSS growth is usually *real cash*.

This cash can be distributed to shareholders right away as dividends -- assuming that the company is reasonably efficient at managing working capital (inventory, receivables, and payables).
29/

But if a chain can only grow by opening new stores, much of its net income is usually needed to cover the upfront costs associated with opening new stores.

This money becomes *retained earnings*; it's not available to be distributed to shareholders as dividends.
30/

This is why Buffett loves See's Candies so much.

See's has pricing power. Each See's store can grow sales each year simply by raising prices.

No need for additional capital to open new stores every year.

Capital is committed only when returns are truly mouth watering.
31/

Here's a 15-year simulation of our store chain, assuming it's able to grow SSS by 7% per year for the first 10 years (and 0% thereafter).

Assuming no "multiple expansion", a shareholder in this chain will earn ~18.21% annualized over these 15 years. Not shabby at all! Image
32/

But if the same 7% growth comes exclusively from opening new stores, our hypothetical shareholder's return drops to just ~9.02% annualized.

What a dramatic difference SSS growth makes!

And it all comes down to just 2 things: operating leverage and capital lightness. Image
33/

It took me a while to work this out, and understand the power of SSS growth in retail/restaurant chains.

I hope this thread helped you gain an understanding and appreciation of SSS as well.

Thanks for reading. Enjoy your weekend!

/End

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