Like-for-likes cause confusion not clarity
As a banker, I often ask myself, what is the fascination with like-for-likes?
While like-for-like (LFL) continues to be controversial in some quarters, it seems to be the lifeblood of investment analysts. So what is it?
One of the problems with LFL is that everybody has a very different description. When observed by several people at the same time, often descriptions can vary enormously.
The ability to measure one business against another is clearly valuable.
This is the core purpose of LFL. Yet for a measure to be meaningful and insightful, the scale of measurement has to be consistent, and it has to be consistently applied so that we can draw sensible conclusions by comparing one set of LFL against another.
LFL’s fatal flaw is that there is no such objective or agreed basis for its measurement. Apart from providing a very slight feel for how one business is performing against another, the value of LFL is questionable.
And given how inconsistent one set of LFL is against another, why on earth do we see them reported to the nearest tenth of a per cent?
As an avid consumer of numbers, ratios, formulae and, particularly, margin, why do I fail to get excited by LFL numbers?
In simple terms, I far prefer to get my hands on something I can dissect clinically, without fear of finding something unexpected, such as adjustments for cannibalised sales consequent to an adjacent store opening or allowance for floorspace closed for refurbishment. Do LFLs include, for instance, refurbished areas as a proportion of the whole, which assumes sales move in direct proportion to square footages. However, we know this to be incorrect, so does it refer to something else?
Even when retailers produce their LFL numbers on a straightforward and consistent basis, do they provide a good measure? The answer has to be yes and no. Yes, if it is a pure retail business that is relatively mature with a stable store portfolio; but no, if you have a business that covers, say, half retail and half wholesale, because then you are only looking at half the performance of that business, which does not necessarily replicate the other half.
And if you are looking at a fast-growing business that is doubling its size year on year over a few years, what relevance does LFL have in informing the investing public?
I suggest that before we move to an industry standard for LFL - which the British Retail Consortium is being encouraged to do - there is a need to explore the basic purpose of the numbers, and how they would be used, in the first place.
From my perspective in the banking industry, LFL can provide an early indication of problems in the absence of regular management information from our customers, but I will still pay significantly more attention to sales and margins together with costs against budget in assessing the performance of a business before giving any great credence to LFL.