The like-for-like sales figures used by retailers to outline their performance at Christmas could be masking the financial problems they face and should not be used in isolation, leading auditors have warned.
Auditors from the UK’s six largest accountancy firms believe the figures are “not the best guide to retail success”, according to a report compiled by trade body ICAEW.
They said like-for-like sales ignore the cost to retailers of adapting to the online shopping revolution, introducing the “national living wage”, and sharp currency fluctuations over the past year.
The comments are the latest criticism of like-for-like sales, which have become the benchmark in the City for judging the performance of retailers.
Like-for-like sales strip out the effects of adding new stores and space over the prior year, meaning a retailer only measures stores that were open a year ago. However, unlike many accounting rules, there is no formal industry standard. This means that some companies include new extensions to stores in their like-for-like sales, such as Sainsbury’s, while others include sales generated by a customer paying with a voucher, and others strip out online sales. Some retailers, most notably Next, do not report like-for-like sales at all.
The debate about like-for-like sales is more pronounced in January because it is when retailers reveal details about their performance during the vital Christmas season, normally with no reference to margins or profits.
For example, Tesco has been heralded as one of the winners of Christmas after returning to like-for-like sales growth for the first time in four years, but its profit margins have been heavily eroded due to the price war with the discounters Aldi and Lidl.
The ICAEW has called for new standards to be introduced for like-for-like sales.
It said in the report: “The retailers who win Black Friday and Christmas are not necessarily those who have made the most like-for-like sales, but those who have made the most money. The most important information – which is sometimes overlooked – is how profitable is the like-for-like sales growth.
“Retailers are finding themselves squeezed between changes in consumer behaviour and expectations – such as greater demand for value and a stronger fight for the consumer pound, rising required investment in infrastructure, overall cost pressure and volatility in commodity prices, all of which are impacting on profit margins.”
Julie Carlyle, the chair of the ICAEW working group and head of retail at accounting and consultancy firm Ernst & Young, said: “Like for like is no longer the only indicator and cannot be looked at in isolation.
“Investors need to focus on profit and companies need to ask how they can react to and plan for the new retail environment. What are the cost implications of the living wage, and can they increase productivity to respond?
“There will be knock-on effects that they may not have considered – the [national] living wage doesn’t just mean increasing pay for those at the bottom; businesses will need to adjust pay scales throughout in order to maintain morale and retain staff.”
