How Does IAS Define "Organic Growth?"
Posted on Wednesday, December 5, 2012
IAS subscriber Lynn Brown wrote to ask about our definition of "organic growth" and how we consider same-store sales in evaluating companies. Here is analyst Scott Horsburgh's response.
The definition of “same store sales” can differ from company to company. However, it would be dirty pool for a company to change its definition without disclosing it publicly. Almost all retailers define it as the change in sales at stores open more than 12 months. Typically, the 13th month is compared to the first month the store was open. Occasionally, some stores might start at a later month such as if the first month is a gala affair with huge sales at a low margin. Some companies start after two years. Consistency within the company is more important than the exact method chosen.
Organic growth definitions also differ. We prefer to focus on sales excluding acquisitions, divestitures, and foreign currency translation. If meaningful, we also occasionally separate out what portion of organic growth comes from unit volume versus price increases. In most cases, we have to go with the information the company provides. While almost all will detail the impact of acquisitions and divestitures, some don’t give specifics on price increases for competitive reasons. We try to give information that helps investors understand how the company is using its resources to grow its base business rather than depending on factors, like currency, that are beyond its control or acquisitions that might not always be attractive. Typically the market pays a higher P/E for organic growth than for growth derived from acquisitions.
- SCOTT D. HORSBURGH, CFA