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QUALIPORT
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Because of their visible high street presence, retailers are always popular among private investors. However, due to the industry's competitive nature, they frequently cause much shareholder heartache. Although a retailer's profits may be heading in the right direction, investors also must determine whether certain operational ratios remain up to scratch. Like-for-like Just about every retailer reports like-for-like (LFL) sales growth within its results. The measure is important for shareholders, as it highlights the underlying improvement in year-on-year sales (i.e. it ignores the affects of closed, refurbished and new shops). Effectively, sustained LFL growth is a sign of continuing customer popularity. Combined with a high share price valuation, deteriorating LFL sales is a good indicator of future investment trouble (Matalan (LSE: MTN is a good example). Apart from the ubiquitous LFL figure, other points to monitor are: * Sales per store; These ratios and their trends can give an insight into whether operating problems lie ahead. Ideally, you'd not want to see: * Sales per store and square foot decreasing; Here's how Qualiport member Carpetright (LSE: CPR) stacks up on those measures. Sales The table below highlights Carpetright's sales per store and sales per square foot of retail space:
The significance of these ratios is shown in the 1997 figures. In that year, group turnover jumped 26%, pre-tax profits improved 28% and like-for-like sales increased by 10% -- all good stuff. However, sales per average square foot of retail space during the year improved by less than 1% (to £101.24). The stores that opened in 1997 appeared to have under-performed badly. Was trouble brewing? Yes it was. In 1998, LFL sales growth was just 2%. In 1998, it was negative 4%. Rent Analysing the rent bill is another important task for shareholders. While a retailer may be able to trim costs elsewhere, rents are typically agreed on a multi-year basis and subject to upward-only reviews. As such, the higher the rent compared to turnover, the greater the profit trouble should the top line stumble. Rent payments are almost always revealed in an accounting note. The example below belongs to Carpetright's 2002 annual report:
* Sales per square foot of retail space;
* Rent per square foot of retail space;
* Rent as a proportion of sales, and;
* Staff per store.
* Rent per square foot and as a proportion of sales rapidly increasing, and;
* Staff per store moving significantly either way (a notable decline may indicate a deteriorating service, a notable rise may indicate unnecessary costs).Year Sales Stores Retail Sales/ Sales per
to (£000) space store sq. foot
April (sq ft 000) (£) (£)
1992 53,445 89 840 668,063 69.86
1993 78,634 116 1,054 767,161 83.03
1994 110,380 145 1,315 845,824 93.19
1995 141,317 186 1,681 853,879 94.34
1996 185,332 246 2,016 858,019 100.26
1997 233,680 292 2,604 869,368 101.24
1998 269,340 307 2,940 899,299 97.16
1999 277,722 333 3,209 867,881 90.33
2000 304,818 321 3,092 932,165 96.75
2001 322,917 325 3,140 999,743 103.63
2002 361,500 347 3,347 1,075,893 111.45
3. Profit on ordinary activities before taxation
Profit on ordinary activities before taxation is stated after charging:
2002 2001
£'000 £'000
...
Amounts payable under operating leases
Rents 40,656 37,066
...
The next table shows Carpetright's rent as a percentage of sales and per square foot of retail space:
Year Sales Rent Retail Rent/ Rent per to (£000) (£000) space Sales sq. foot April (sq ft 000) (%) (£) 1992 53,445 6,167 840 11.54 8.06 1993 78,634 7,834 1,054 9.96 8.27 1994 110,380 9,833 1,315 8.91 8.30 1995 141,317 12,404 1,681 8.78 8.28 1996 185,332 16,689 2,016 9.00 9.03 1997 233,680 21,387 2,604 9.15 9.26 1998 269,340 28,799 2,940 10.69 10.39 1999 277,722 32,514 3,209 11.71 10.58 2000 304,818 35,345 3,092 11.60 11.22 2001 322,917 37,066 3,140 11.48 11.90 2002 361,500 40,656 3,347 11.25 12.53
Although rent per square foot has trended higher over time, Carpetright has managed to contain the overall bill as a proportion of turnover. On balance, Carpetright's rent profile is not overly concerning.
Staff
The final table highlights the average store size and the number of staff employed per store:
Year Staff Stores Retail Store/ Staff per to space size store April (sq ft 000) (sq ft) 1992 539 89 840 9,563 6.74 1993 736 116 1,054 9,239 7.18 1994 935 145 1,315 9,077 7.16 1995 1,155 186 1,681 9,051 6.98 1996 1,590 246 2,016 8,558 7.36 1997 2,058 292 2,604 8,587 7.65 1998 2,255 307 2,940 9,255 7.53 1999 2,337 333 3,209 9,608 7.30 2000 2,683 321 3,092 9,635 8.20 2001 2,893 325 3,140 9,647 8.96 2002 3,278 347 3,347 9,653 9.76
Over the past decade, the size of a typical Carpetright store has remained around 9,500 square feet. However, even though the stores have not got any bigger, the number of staff manning each outlet has gradually increased. So, not only have additional shops aided Carpetright's long-term growth story, extra manpower within them appears to have been a component, too. On the flip side though, staff wages as a proportion of turnover has inevitably increased over the years.
Summary
Any problems for Carpetright then? Not really. Even with higher rent and staff numbers per store, Carpetright still registered its best ever operating margin in 2002 -- 14.4%. While the costs associated with extra outlets and salesmen have bit slightly into profits, they've been more than offset by the resultant economies of scale and dramatic improvements in the gross margin.
More: Does Your Company Have A Staff Problem?
The author owns shares in Carpetright.