A practical example of Same Store Sales
Let's say you own one local hardware store. That's it, just you against the world. To keep things easy, you sell $1,000,000 per year in your clever little store. You have fixed costs of $250,000 in lights, rent, and pesky employees that are not robots yet. You like to offer your customers a deal, so your gross margins are 35%. Your profit would look something like this.
Sales / Gross Profit / Overhead / Net Profit / After Taxes$1,00,0000 / $350,000 / $250,000 / $100,000 / $85,000*
*You have a decent tax attorney.
Ok - not bad, you're making a living. But let's say you can grow your sales year over year at a 5% rate, while your expenses (Pesky employees that are not robots yet, Fedex and UPS doing their annual hike, greedy landlords raising the rent) goes up at 4%. Accounting note for you professionals out there - yes direct labor should be in cost of sales but I'm keeping this simple remember? So, let's look out over 5 years.
5% Same Store Sales Growth (company 1)
Year / Sales / Gross Profit / Overhead / Net Profit / After Taxes1 / $1,050,000 / $367,500 / $260,000 / $107,500 / $91,375**
2 / $1,102,500 / $385,875 / $270,400 / $115,475 / $98,154
3 / $1,157,625 / $405,169 / $281,216 / $123,953 / $105,360
4 / $1,215,506 / $425,427 / $292,465 / $132,962 / $113,018
5 / $1,276,281 / $446,698 / $304,164 / $142,534 / $121,154
Total / $5,801,912 / $2,030,669 / $1,408,245 / $622,424 / $529,061
**You now have a fantastic tax attorney
Not bad - you should be proud of yourself! Now what happens if our Same Store Sales declines just 2% a year… That can't be so bad can it?
-2% Same Store Sales Growth (company 2)
Year / Sales / Gross Profit / Overhead / Net Profit / After Taxes1 / $980,000 / $343,000 / $260,000 / $83,000 / $70,550
2 / $960,400 / $336,140 / $270,400 / $65,740 / $55,879
3 / $941,192 / $329,417 / $281,216 / $48,201 / $40,971
4 / $922,368 / $322,829 / $292,465 / $30,364 / $30,364***
5 / $903,921 / $316,372 / $304,163 / $12,209 / $12,209***
Total / $4,707,881 / $1,647,758 / $1,408,244 / $239,514 / $209,973
***Not too worried about taxes at this income level
Now that's a big difference! In the years three and four you'd be contemplating trying to get some extra income from writing investment articles on Seeking Alpha. By year 5, you're looking for an asset sale. In just five short years you are $319,088 worse off than the first scenario and well on your way to the end. Back in year one, what would an investor pay for the first scenario with 5% Same Store Sales compared to the second situation? Many multiples more. Company 2 is now a fire sale.
It sure won't help to invest in new stores if your existing store sales keep dropping. If in between years three and four, you opened a second store with the same results, yes, your net income from year three to four would rise from $40,971 to (2 x $30,364) or $60,728 (whoa 50% growth!), but the next year your earnings would collapse to $24,418 (2 x $12,209). This is the reason the metric of Same Store Sales is so important in growth stories and not the net income number for the quarter.