Analysing... Retailers

Share this

"Retail is detail", so the old cliché goes. But most analysts of stores shares aren't too interested in whether a store's sales come from the high street or from an out-of-town mall. The numbers tell the story, and little else is needed.

But what numbers do you need to pick out a successful retailer?

Retail is about shifting goods profitably through the selling space you own or lease. Most stores have areas for offices and storage that are not devoted to selling goods. So analysts work on the basis of net selling space - the area where goods are actually viewed by the customers - measured in square feet.

So dividing sales and profits by square feet of selling space gives sales per square foot and profit per square foot. These two key ratios measure how good a job a retailer is doing. More importantly, they compare directly with similar numbers from other stores groups. Retailers often quote these numbers in their annual reports and press releases.

It's crucial when looking at numbers like these, though, to keep an eye on what is being sold. Food retailers operate on much smaller margins than clothing stores. This means that comparing sales per square foot between Debenhams (DEB) and Tesco (TSCO), for example, won't give a meaningful figure.

It's also important to look at an individual retailer's track record in sales and profit per square foot. These figures should rise each year, if only because of inflation. If they don't, it might mean that the business is becoming less efficient at utilising its selling space as time goes on.

Another number which retailers often provide is like-for-like sales growth (sometimes called sales through existing outlets, or same-store sales). This strips out the effect on sales of the company opening new stores in the course of the year. Look for like-for-like sales growth that's ahead of inflation. Anything less suggests an underlying decline in the volume of goods sold between one year and the next.

One other measure of retailer efficiency is stock turnover. This varies from one retailer to the next because of differing sales mixes. A food retailer turns over stock rapidly, because it sells mainly perishable goods. A clothing store or jeweller will turn over stock more slowly. Stockturn, as it's often called, is found by dividing annual sales by the stocks figure from the year-end balance sheet.

So, for example, a retailer with annual sales of £400 million and stocks of £50 million will have a stockturn of eight times.

Stockturn is often expressed in days. You can calculate stock days by dividing stockturn into 365. In the previous example, therefore, stockturn is around 45 days (365/8). However, it's worth bearing in mind here that retailers choose their year-ends at a time when stocks are low. Many retailers close their books at the end of January, after Christmas and the January sales.

So measuring stockturn on end-January stocks understates how much stock they are financing over the course of the year as a whole. Stock days should also stay constant over time. If they start to rise (that's to say, stock turns over more slowly) it can be a sign of trouble ahead.

It is also possible to work out debtor days (trade debtors divided into sales) and creditor days (trade creditors divided into cost of sales) in the same way by dividing the resulting numbers into 365 to get the equivalent days. Big imbalances between debtor and creditor days are an oddity for most companies.

For stores groups with large buying power, however, creditor days tend to be much longer than debtor days, because big retailers have the clout to delay paying their suppliers. On the other side, they get cash on the nail from shoppers, so debtor days are short. In effect, therefore, suppliers' credit terms - voluntary or forced - help to finance the business of the big retailer.

A final important point to bear in mind is that retailers differ in the degree to which they own their own stores. Many stores are leased, but some retailers also trade from their own freehold properties. When comparing profitability of different stores group, allowance needs to be made for the notional rent that would have been paid if all of the properties had been leased.

Stores groups with large portfolios of freehold retail property sometimes become takeover targets, because the properties they own might have an attractive alternative use value to a developer. In this case they are often worth more dead than alive.

Retailing history is littered with examples of stores groups with large city centre freehold stores that morphed into office blocks after a takeover.