Retail / Department Stores / Performance Metrics 3 comments

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While topline performance in the retail sector is often focused on, its growth can come from two sources: increase in number of stores and sales per store. Whether it is driven by one or the other has an impact on the bottomline.

Same-store sales growth:
The growth in sales in a particular store, equals (Total sales)/(Total no. of stores). This is the key figure to watch as it indicates whether every store is increasing its productivity, on the average.

The importance of this figure can be appreciated if one understands that every new store incurs fixed overheads like rent and salespeople. That means it is preferable to grow sales at existing stores where sales gain flows entirely to bottomline (after deducting for direct merchandise costs) rather than to build sales by building new stores. Companies that are not doing well in this aspect often gloss over same-store sales and focus on topline growth eg. Osim.

A related measure is the sales per square feet ratio, obtained by dividing total sales by number of sqft of selling space that the company controls. A rising ratio means the company is making increasingly better use of their real estate.

Revenue per employee:
The other key input is sales employees and this ratio, obtained by dividing sales by total number of employees, is simply another means of measuring productivity per unit of labour input (as opposed to "property input" above).

Inventory turnover:
It is obtained by dividing COGS (cost of goods sold) by average inventory held by retailer throughout the year. The higher it is, the more times the retailer converts inventory held to sales (ie. fast turnover).

This figure should be viewed in context. Discount retailers often have high inventory turnovers as they mark down merchandise aggressively in order to generate higher sales; profit margin is also lower. On the other hand, retailers of prestige items turn over inventory much more slowly while maintaining high profit margins. Hence, this figure is best compared not across industry, but over time for the same company (provided it pursues similar retail strategy).

References:
(1) Bound For Growth (David Wanetick)