In this series, we bust the jargon and explain a popular investing term or theme. Here it’s LFL.
What does this stand for?
LFL is an abbreviation of appreciate-for-appreciate, a widely used term in the retail sector.
It is a measure of growth in sales – over a set period of one month, six months or over a year – that strips out the impact on turnover of new store space.
LFL numbers began to appear in retailers’ figures in the 1980s.
This was against the background of a rapid expansion in the sector in the US and the UK.
Important: LFL is a measure of growth in sales – over a set period of one month, six months or over a year – that strips out the impact on turnover of new store space
Stores were opening on the High Street and huge shopping centres were being built.A simple metric was needed to appraise the underlying performance of the retailer.
Are LFL numbers still important?
Definitely. Almost more so. The LFLs are some of the most closely watched figures in a retailer’s results since they are seen as a guide to the true health of the business, particularly at a time appreciate now when consumers are in a cost of living squeeze.
This week, for example, news of the 5.5 per cent fall in LFLs during the Black Friday period at the stores of fashion retailer Quiz, increased speculation that the loss-making company will be up for sale – although it also sells online.
By contrast, when Marks & Spencer reported last month that its LFL food sales rose by a better-than-expected 11.7 per cent in the first half, this caused a bounce in its shares. In a month’s time, when the Christmas trading updates appear, the City will be paying close attention to the LFLs from the supermarkets as a gauge of the appeal of their festive food offer.
Any other reason why I am reading about this?
Retailers are increasingly conscious of the need to make clear what is included in their LFL numbers.
This is against the background of a debate over the reliability of LFLs, given the extent of revolution in the retail sector in recent decades.
What are the objections?
The lack of a firm definition of what the LFL should show means that, in some cases, comparisons may be less than valid.
The critics insist that the figure does not contemplate such things as a change in product mix that involves a shift to cheaper or more expensive merchandise, or the boost to turnover of a refurbishment that makes a store brighter and more welcoming.
The impact of the advance to online purchasing during the pandemic is another factor heightening the debate.
And how are retailers answering their critics?
Some are providing much more information in annual reports and accounts in an attempt to answer critics.
In its accounts for the year ended January 2023, High Street fashion giant Next gives a breakdown of its LFL figures, based on store location.
During the pandemic, shoppers preferred out-of-town retail parks, with their big car parks, to less spacious city centre stores but this trend has reversed.
Next’s full-price LFL sales in all types have risen by 2.6 per cent since 2019/20.
Supermarket giants Tesco and Sainsbury’s show LFL figures excluding fuel and including fuel, so that investors can get a clear picture of the performance of their food divisions.
