Every quarter and, for most restaurants and retailers, every month, same-store sales numbers are released. Same-store sales growth measures sales at locations open for at least a year and excludes sales increases attributed to current openings. For purposes of reporting, same-store sales are also known as comparable-store sales or comps.

But, what if a new store doesn't fully mature in 12 months? The process of that new store reaching maturity in yeartwo oryearthree helps boost the same-store sales figure, while sales at older stores may not be growing at all or are declining.

This is a very important consideration for companies that are transitioning from aggressive growth into slower or steadier growth. As long as they can open a greater number of stores year after year, the comps will look impressive. But every company's expansion plan reaches an inflection point — they're still growing, just not as fast. This has two effects. First, opening fewer stores obviously translates into smaller new store sales growth. Second, having fewer stores entering those productive years two and three also lowers comps.

The combination of slower new store growth and lower comps can send overall growth and the stock price plunging quickly. From 1995 to 2000, Office Depot averaged 14 percent per year in new store growth. However, the office supply store business quickly became saturated when competitors Staples and Office Max also engaged in aggressive expansion plans. In 1999 and 2000, the last two years of its rapid expansion. Office Depot's total same-store sales increased 6 percent and 7.5 percent. In 2001, new store growth stopped and same-store sales declined 2 percent; the stock price sank below $10 from a high in the mid-$20's in 1999. So companies have to make a concerted effort to keep stores clean and fresh. Lowe's has benefited mightily in its battle with Home Depot because its stores are widely perceived to be more aesthetically pleasing and easier to navigate. Home Depot is reinvesting in its stores, but as we mentioned in the restaurant section, maintenance and renovation is easier than reinvention.

• Keep an eye out for store traffic. You don't want to see a traffic bottleneck
at the checkout aisles, but you don't want to see empty parking lots on
weekends either. This is particularly true for specialty retail companies
such as clothing stores that cater to a particular demographic. Traffic to
teen hot spot Abercrombie & Fitch and women's outfitter Chico 's FAS has
remained relatively robust even in times of lax consumer spending. These
stores have carved out a brand identity and won customer loyalty, and their
stock prices held up during the tough market conditions in 2OOI and 2002.
Remember, though, specialty retailers have a much shorter shelf life than
traditional retailers do, so these investments have to be monitored much
more closely.

• Successful retailers have a positive employee culture. After all, retail is
about customer service—period. Sam Walton helped build Wal-Mart into
the largest retailer (and largest company) in the world based on sales using

Many retailers use operating leases to "rent" space for their stores. Because these leases aren't capitalized and are kept off the balance sheet, they understate a firm's total financial obligations and can artificially inflate financial health. The leases aren't inherently bad or sneaky; in fact, their existence is core to most retailers' expansion plans. Lease obligations can be found in the footnotes of a firm's 10-K under the heading "commitments and contingencies."

Be sure to give a retailer a thorough checkup before declaring it to be in tip-top financial shape. For example, Tommy Hilfiger appeared to have pretty good financial health going into 2002. The firm had $387 million in cash and $638 million in total debt. However, the specialty apparel firm also had $273 million of future financial obligations in the form of operating leases. If we add off-balance sheet leases to the debt on the balance sheet, the total comes to $911 million, and the coverage ratios don't look as robust. Tommy Hilfiger entered 2002 with declining sales and stagnating profits and cash flow. When Hilfiger announced that it needed to close many of its retail stores in October 2002 and pay to break the leases, the stock price was hammered the premise that the customer is always right. During its growth heyday in the 1990s, Home Depot's employees were always visible and customers usually walked away satisfied. In 2001 and 2OO2, Home Depot's service waned noticeably, largely due to an influx of part-time employees who didn't have the same connection to the company.

As we've mentioned numerous times in earlier chapters, great companies in attractive industries generate returns on invested capital that far exceed the cost of capital. However, retail is generally a very low-return business with low or no barriers to entry. Retail bellwethers Wal-Mart and Walgreen earn little more than 3 cents profit for every dollar of sales, so store management is critical. The problem is that many retailers don't execute as flawlessly as these two and flame out as soon as trouble hits.

The sector is rampant with competition. Think of all the specialty apparel shops that try to imitate Abercrombie & Fitch and Gap. A few succeed; most fail, but the point is that nothing exists to prevent new concepts and stores from being launched. There are few, if any, barriers to entry. Customers may be swayed to buy a cool $50 sweater, but they'll quickly go to the store next door if the same sweater can be had for $40.

The primary way a firm can build an economic moat in the sector is to be the low-cost leader. Wal-Mart sells items that can be purchased just about anywhere, but it sells it all for less than the competition, and consumers keep coming back for the bargains. Others may try to imitate Wal-Mart's strategy in the short run but lack the economies of scale to remain profitable employing the strategy in the long run.