Retailers will soon face the challenge of providing quarterly results – which are typically grounded in same-store sales (or “comp”) results – when all or most of their stores are closed. In this environment, a comp result can be replaced by other details on the business that will help management teams clearly explain their financial results and will also be useful to analysts and investors as they update their projections.
With all or most domestic and European stores now closed, and potentially some Asian stores now reopened after having been closed, how should companies treat comps?
Some important things to remember:
- For analysts and investors, comps are believed to represent the underlying health of a brand or retail concept because they are a reflection of the like-for-like performance of a significant percentage of the overall business.
- Comps are one of the primary drivers of the P&L, impacting not only sales but also gross margin and the SG&A ratio. A comp’s impact on a company’s P&L in a quarter serves to inform analysts of the potential operating leverage/deleverage of the business which is then incorporated into their updated projections.
- Most companies remove stores from their comp base that are closed for reasons such as remodeling, , weather, or other short-term disruptions. However, this typically would account for fewer than 5% of stores at any given point in time. And most companies include their e-commerce businesses in their comp calculations, which pre-crisis tended to range from 10% to 40% of total sales.
- For at least the next couple of quarters, investors will be much more focused on companies’ balance sheets and cash flow statements than their bottom line earnings. This will take pressure off reporting metrics like comps. And when liquidity risks eventually wane, investors will be looking to next year’s earnings in their valuation analyses.
- Finally, when thinking about any disclosure, a company should never do a “data dump” on investors without controlling how the numbers will be interpreted. Controlling the analysis is how companies keep analysts from making the wrong assumptions in their projections. Every number or metric disclosed should be provided for a good reason and explained.
So how should a company calculate the comp that it reports when all or more stores are closed, or when stores start to re-open one region at a time? For starters:
- Remember why comps are useful in the first place (see above). If the number will not be representative of the underlying health of the brand / concept or help in the updating of projections, companies should reconsider (a) not providing it at all, (b) updating the comp definition/calculation to make it more useful, and/or (c) providing supplemental disclosure.
- If a comp is not reported, other information about the business that will be helpful to analysts should be offered. Once things normalize, disclosure can revert to where it was pre crisis.
Example:
All stores located in the U.S. are closed for the second half of the quarter; Asian stores re-opened after being closed; and e-commerce continues to operate and is now a large percentage of sales.
- With so many stores closed for an extended period, the comp loses too much of its meaning and usefulness, and should not be reported in the traditional way.
- Management can offer color on the performance of stores during the time they were open within the quarter.
- Investors will want to know how the business in Asia is trending since the time stores reopened, and it should most likely be a month-to-month discussion versus just results for the quarter. This does not set a precedent for future disclosure.
- Management should comment on year-over-year ecommerce growth including how it believes the crisis has impacted this part of the business (this normalized the year-over-year results).
- Any color on expenses and margins and how they were impacted by both the loss of sales and costs cutting efforts is also very important.
Next: if a company stops reporting comparable store sales, when does it resume it?
- First, remember that a year from now many companies may not be able to report comps because all or most stores will have been closed for the same prior-year period. So this is not just a short-term issue.
- When most stores reopen and reported comps can 1) offer an indication of the true underlying health of the brand or concept or 2) help analysts update their models using similar (or hopefully improved) comp results for future periods, then it would make sense to resume reporting them. Management should include more information or color on the results than normal during this period in order to facilitate the correct analysis of the results by analysts and investors.
- If all or most stores are re-opened for one or two months but not the entire quarter, it could be helpful to report year-over-year sales results for like stores for the periods in which they were open in both years if it helps to inform about brand health and future financial results. The term “comp” does not have to be used, or it can be used in a discussion but not officially reported in the traditional way.
Conclusion:
There are many scenarios that could play out for U.S. retailers, and every company is in a different situation. When determining if and how comps should be reported, it will be important to remember why this metric is so important to analysts and investors in the first place. Also, this will be a time when extra information should be offered that allows for the correct interpretation and analysis of quarterly results, especially if guidance will continue to be withheld. A comp result can be replaced by other details on the business that will help management teams clearly explain their financial results and will also be more useful to analysts and investors as they update projections.
