Lesson 6 of 7
Reading a retailer
A retailer is read on comparable-store sales, inventory against sales, and the store leases ASC 842 put on its balance sheet as a liability.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Comparable-store sales separates growth at the stores already open from growth bought by opening new ones, and only the first is repeatable per store.
- Inventory growing faster than sales for more than a quarter or two usually means a markdown, and a margin hit, is coming.
- ASC 842 put the store lease on the balance sheet as a liability, so a retailer's real fixed obligations now show up where debt used to be the only entry.
A retailer is read on whether sales at its existing stores are growing, on whether its inventory and its sales are growing at the same pace, and on leases that now sit on the balance sheet as a real liability rather than a footnote.
Where a 7 percent sales gain came from
- Comparable stores3%
- New stores opened+5%
- Stores closed−1%
- Total sales growth= 7%
Same-store sales isolate growth
Total sales growth mixes two very different things: stores that were already open selling more, and the retailer simply opening new stores. A chain can post rising total sales for years while its existing stores sell less every year, as long as it keeps opening new ones fast enough to cover the gap. Comparable-store sales, sometimes called same-store sales, strips new openings and closures out and reports only the growth at locations open in both periods being compared. It is the closer measure of whether the underlying retail concept is working, because opening a store is a capital decision a retailer can choose to stop making.
Inventory against sales
Inventory sitting unsold also ties up cash and warehouse space, so the signal shows up in the cash flow statement before it shows up in the gross margin line. A build in inventory is a use of cash in the operating section, recorded the quarter it happens, ahead of the markdown that follows.
The lease came onto the balance sheet
Many retailers lease most of their stores. Under ASC 842, a retailer records a lease liability and a matching right-of-use asset for nearly every store lease, sized as the present value of the rent payments still owed. Before this standard, that same obligation sat only in the footnotes as an off-balance-sheet commitment. It has not changed what a retailer owes. It has changed where that obligation is reported, and a debt figure that leaves the lease liability out is missing what is often the largest fixed commitment a retailer carries.
Do it on a real 10-K
- Read comparable-store sales in Item 7 and compare it with total sales growth on the income statement.
- Compare inventory growth on the balance sheet with total sales growth, not comparable-store sales alone.
- Open the lease footnote's maturity table and check how much of the lease liability falls due in the next twelve months.
Check yourself
A retailer's total sales rose 7 percent this year, but comparable-store sales were flat. What does that combination suggest?
- The retail concept itself is growing well at every store
- The growth came mainly from opening new stores, not from existing stores selling more
- Inventory is being managed poorly
Show the answer
Answer: B.
Flat comparable-store sales alongside rising total sales means new store openings, not stronger demand at existing locations, are driving the headline number.A retailer's inventory has grown faster than its sales for three straight quarters. What typically follows?
- Gross margin usually improves as scale increases
- A markdown to clear the excess stock, which pressures gross margin
- Nothing: inventory and sales growth are unrelated
Show the answer
Answer: B.
Inventory building up faster than sales for several quarters running is a sign of stock the retailer could not sell at full price, and clearing it with markdowns is the usual next step.Under ASC 842, where does a retailer's store lease obligation now appear?
- Only in a footnote, as before
- As a liability on the balance sheet, with a matching right-of-use asset
- It is not required to be disclosed at all
Show the answer
Answer: B.
ASC 842 requires most leases to be recorded on the balance sheet as a liability and an asset, replacing the footnote-only disclosure that applied before it.Sources
- ASC 842, Leases.
What this leaves out
- Comparable-store sales definitions vary by retailer: how long a store must be open before it counts, and whether e-commerce sales at that store's market are included, differ from one company's disclosure to another.
- The inventory and margin relationship here is a general pattern, not a rule: a planned inventory build ahead of a known demand event is a different case from an unplanned one.
- Under US GAAP an operating lease still shows one rent-like cost in operating expenses, so margins did not change with ASC 842, and many debt figures still leave the lease liability out.
- The waterfall and the inventory example use round invented numbers so the arithmetic can be checked by hand.
- Nothing here is advice about any security.