Adding new stores and the implications for profitability, cash flow

Adding new stores is an important way of growing a retail business. However, it is important to realize that new stores take three to five years to reach maturity and in their first year or two, they may be unprofitable. Hence the rate at which new stores are opened requires very careful planning.

In addition, if stores are opened at too fast a rate, it detracts management attention from existing stores and their performance may suffer. Hence, it is very important to track comp store sales on a weekly basis and react to any adverse trends.

Comp store sales is defined as the sales increase this year over last, only for stores open in both years. Hence, it removes the impact of new store openings. There have been many examples of companies reporting sales growth while comp store sales were declining. The added sales from the new stores camouflaged problems in the existing store base. In the longer term, the new stores report declining comp store sales adding to the general decline.

Comp store sales can be measured for this week, this month, season to date and year to date. When reviewing comp store sales, it is important to know the current inflation rate. For example, suppose inflation is 2% and comp store sales are 5%. What this really means is that the business is doing 3% better than inflation, so unit volume is growing. If inflation is 4% and comp store sales is 2%, unit volume is really shrinking at 2% a year.

It is also helpful to know what competitors or similar retailers are doing. The financial press reports comp store sales figures for public companies on a monthly basis, so it is easy to keep track of other similar retailers in this regard.

While all companies need to address declining comp store sales, it is doubly important for companies opening a significant number of new stores relative to their size.

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