Same Store Sales
By Spencer
With Christmas season upon us and a great deal of attention being focused on the retailers reports of same store sales I thought it would be a good time to report on one of my pet peeves.
I see people time and time again taking the retailers same store sales data and deflating it with the overall CPI to estimate “real” same store sales. But this
significantly overstates the inflation rate and understates the growth in same store sales. I even see members of the Federal Reserve Board doing this and they really should know better.
The relevant deflator to use is the deflator for GAFO sales, or department store type merchandise. GAFO represents stores that specialize in department store types of merchandise (furniture & home furnishings, electronics and appliances, clothing & accessories, sporting goods, hobby, book, music, general merchandise, office supplies, stationery, and gift stores.
Currently, the year over year change in the CPI is -0.2% and the core CPI is up 1.7%. But the year over year change in the deflator for GAFO sales is -2.1% and it has been falling at -3 % to -5% rates over the past few months.. Moreover, this roughly two to four percentage point difference between the two measures is fairly normal. The GAFO deflator has been negative — usually at -1% to -2% rates — every year since 1995. This difference consistently causes economists and others to significantly understate the strength of consumer spending.
But doesn’t same-store sales also overstate the strength of consumer spending this year? Since many other stores have gone out of business, the remaining ones have larger market share. So, if hypothetically consumer spending remained flat (or even went down), same store sales would go up, since we’re not counting stores that are no longer in existence.
LIBERT–you are right, but it still does not invalidate my point.
Hi Spencer,
Just wondering how this current post effects your post on the subject from 8/08:
http://angrybear.blogspot.com/2008/08/retail-sales.html
Will the decline in GAFO deflator create an image of increased purchasing power?
Spencer, you are losing the point. You simply cannot have this accurate of a change.
It is not true, I don’t care if you run the numbers out to 50 places from the decimal point. You have no clue as to what the undermarket is doing. The dollar stores are blooming and I know personally that, at least, 300 are not registered as anything, no business license, no employer taxes, no employee health coverage. Nada, straight cash. The amount of the stores in five states would make total hash of your point.
If you want to make this kind of point, you need identical data at two seperate points in time from the same organizations, otherwise, you are simply blowing smoke.
You have no knowledge of how many people are slipping over into the black market right now, because no one has ever been able to measure it. If Bernie the Ponzi king was not detected as being a crook, the amount of the blackmarket alone in all areas will basically make hash out of anything that you try to pretend to measure down to a fraction of a decimal point. Your best guess right now would not be correct for single digit guessing.
Step back take a deep breath, now do it again. Now say three times, “economics is not a science.” It is all smoke and mirrors. When you have controlable numbers over a long period of time (like 250 years), it may become a science. Right now it is on par with the soothsayers of Rome that told the future from fresh killed animal guts. The numbers and the ways of recording them are simply too disparate for you to predict anything about them.
Please, you are running into a dead end. Now, please, drop the exact decimal point crap. Just say, my best guess is ” whatever .”
Hell, the damned military admitted a couple of years ago that they could not account for 3 or 4 trillion dollars they disappeared and they have auditors.
Divorcedone — it does not impact the other post because it was based on data deflated by the same deflator I’m talking about now.
Without thinking about this as much as I should — GAFO is not the proper deflator for comparing year to year sales revenue. What a GAFO correction tells us is the change in QUANTITY of goods one dollar purchases. That’s an interesting number, but it sort of tells us how many baubles the consumer is lugging home, not how much money the store took in.
If we wish to correct the store’s revenue for inflation, we probably want a correction factor that describes inflation in the stuff the store spends money on — wages, rent, taxes, administration, product, shrinkage, etc. CPI is probably not an especially good estimate of that because Owner Equivalent Rent is such a large (and problemetic) part of CPI, but neither, I think, is GAFO.
Sound reasonable?
VTC,
I suspect you are right, because you are interested in revenue. That is a measure of the strength of the firm or the retail sector. The typical goal in this exercise is to assess the strength of consumer demand. That seems to be what Spencer is after here. So the GAFO deflator may not be right for what you have in mind, but is for what he has in mind.
ICSC reports same store sales down 0.3% y/y in November. Reuters says up 0.5%. Either way, that’s between 2% and 4.3% lower than expected.
Yes, I agree. If we are interested in consumer enthusiasm, GFAO is an appropriate factor. Better yet perhaps would be to adjust for disposable income also. But consumer enthusiasm per se seems sort of a dead end statistic except possibly when talking about durable goods like automobiles that will eventually have to be replaced. Do economists really care whether my neighbor buys a plasma TV or settles for a netbook on sale except in as much as it affects store revenues?
Actually the Bureau of Labor Statistics computes the Department Store Inventory Price Index index of retail prices that retailers use to adjust the value of their inventories that the carry over from year-to-year.
This started in the high inflationary 1970s when inflation created a major issue for replacement cost accounting. Retailers use the index to deflate inventory holdings so they do not have to pay taxes on phantom profits from inventory profits caused by inflation.