This post is part of the On the Margin blog.
Same-store sales are a terrible measure of a restaurant chain’s performance.
That sounds awfully rich coming from a guy who more or less earns his living off writing about just that thing. And same-store sales do provide a good indication of how existing locations are able to generate more interest in their business, absent new unit growth.
But as same-store sales have weakened, somewhat surprisingly, this year, and more companies have struggled to match expectations, the data point’s weakness has become more obvious. Here’s why it’s such a terrible number to rely upon:
• It’s a short-term view. Same-store sales are sales at existing locations measured over a single point in time and compared with that same point in time a year earlier. The most widely reported figures are quarterly, which is only three months.
The number generates an easy headline that can attract writers such as myself like moths to a light. One good quarter and a restaurant chain has momentum. One bad quarter and it’s suddenly losing business to competitors.
But three months is awfully short. McDonald’s Corp. is a good example of this. The chain's same-store sales weakened for three straight years, a sure sign that it was, indeed, struggling. But then, in the fourth quarter last year, same-store sales turned positive, and suddenly the chain was seen as being on the comeback trail.
One quarter does not erase those three tough years. On the other hand, a company that has generated consistent same-store sales growth, but that has suddenly started to see declines, shouldn’t panic, either.
Or, as one CEO recently put it to me: “If you have a bad quarter, just wait a year.”
• Random issues influence results. Noise also influences same-store sales. That period of time can be easily influenced by such factors as whether Easter was in March or April, or whether the Fourth of July landed on a Sunday or a Wednesday.
Weather is the big factor, wreaking havoc on sales in one quarter and enabling a sparkling quarter one year later. Then there’s Leap Day. The one month this year with positive restaurant traffic was February, when traffic rose 0.7 percent, according to MillerPulse. February included that extra day.
The two-year trend is vastly superior, looking at sales over two years and factoring out one-time events, and providing a more even picture of a company’s sales performance.
• It hides weakness. When I looked at Cracker Barrel’s fourth-quarter earnings report Thursday morning, showing a 2.7-percent increase in same-store sales, I was pleasantly surprised. “Hey, Cracker Barrel beat the sector,” I thought.
Yes, it did. But average check rose 4.4 percent. Same-store traffic fell 1.2 percent.
For Cracker Barrel, fewer customers paying more money is not necessarily a bad thing. But the company lost traffic momentum as the quarter went on, from 0.4-percent growth to a 2.7-percent decline. Operators typically want to balance some traffic growth with higher average check.
The lower traffic could also point to customers abandoning higher prices, a major issue this year as consumers are clearly opting to eat lower-priced food at home more often.
• It results in bad decisions. Because same-store sales generate so much attention, companies can spend more of their time focusing on getting that number in a positive direction.
Companies looking to keep that pressure at bay and yield a few better headlines can be prone to making sales-oriented decisions to boost short-term results at the expense of long-term profits.
“I can’t take same-store sales to the bank,” Five Guys CEO Jerry Murrell told me in an interview this week. “I can take profits to the bank.”
Again, none of this is to say that we shouldn’t focus on same-store sales. But companies that focus too much on that number at the expense of longer-term sales and profitability performance risk hurting their companies in the long run.