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Apple: For What It’s Worth

Something’s happening here
What it is ain’t exactly clear
—Stephen Stills, “For What It’s Worth”
 Something’s happening at Apple.  We’re not sure what, but something’s happening.
 Yes, everybody knows Apple’s quarterly earnings report disappointed Wall Street’s Finest.  And yes, everybody knows Apple managed to calm the disappointed herd, mainly by using the phrase “we’re thrilled” seven times during the call while pointing out that the big miss in iPhone sales was likely due to everybody waiting around to buy the new iPhone 4S.
 But not one of Wall Street’s Finest—not one—asked about the most disturbing pattern coming out of Apple’s earning release: the measly 1% year/year revenue increase at Apple’s retail stores, the 26% year/year profit decline at Apple’s retail stores, and the mere 4% year/year growth in visitors to Apple’s retail stores.
 Certainly, there was an impact at the retail stores from the Apple Faithful waiting for the new iPhone.  But even before this quarter’s jaw-dropping sequential-quarter momentum collapse from up 36% in June to up 1% in September—a downshift we can not recall seeing at any retailer, ever (please come up with one, and we’ll highlight it here)—the Apple retail stores had been losing their mojo.
 For example, from the December 2009 to the June 2010 quarter, retail visits rose from 51 million to 61 million.  This year, visits from December 2010 to June 2011 did not rise at all—from 76 million to 74 million.
 Something’s happening here.  What it is ain’t—exactly—clear.
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at Amazon.com
© 2011 NotMakingThisUp, LLC
                                                             
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.
NOTE ON COMMENTS: We abide by one rule on the comment pages here, and that is NO “Yahoo Message Board-Type Language.”  So whatever you write and whether or not you agree or disagree with something, spell it correctly and keep it clean, and no personal stuff.  And if you think we won’t enforce that, well, we have over 300 comments that never appeared because they were sloppy, obscene, or personal. —The Management

62 replies on “Apple: For What It’s Worth”

Perhaps Apple has expanded channels in the US and Europe. iPads are now sold through SAMs/Walmart and Costco. Best Buy has both iPad kiosks and an entire sub department dedicated to Mac.

While the Personnel in the stores are very helpful, the wait time for assistance is long, even with an appointment. Perhaps the stores are at their capacity.

Because no one cares where they sold their products as long as they sold them. Ecommerce is where its at anyways, the stores are just for show and to hype the brand. Disclosure: Author is short AAPL

Can you provide a link to the Stores data? I've gone through every filing out there and couldn't find a single reference to such statistic…

Can you publish the data you are using to base your analysis on? All I can find is a comment by Peter Oppenheimer that Q4 was 1% above Q4 the year before. No Y/Y comparison. The 8K and Apple published spreadsheets don't have separate Retail Store numbers, that I can find.

Jeff, you should run the numbers for the entire year. Y/Y retail sales are UP 44% (14.1B vs. 9.8B) Margin is up 15% (1.5B vs. 1.3B) Mac sales up 23%.

Quarter to Quarter the numbers bounce around. We'll have to see what 1Q2012 brings, but it seems a little early to ring a warning bell.

I had just posted under Anonymous, but looked at my numbers and had decimal point issues.

The Y/Y retail sales data pulled from the last 4 conference calls are:

Y/Y sales growth 44%
Y/Y margin growth 40%
Y/Y Mac sales growth 24%
Y/Y average store sales growth 28%

So 4Q2011 was not the blow out they usually get. But iPhone malaise may be the the rev story, the margin story is probably the large # of stores opened. But I'm only guessing. We'll know in January.

We weren't talking about Mac sales, or 12 month FY2011 sales.

We simply identified a sharp slowdown in y/y sales growth in the Apple retail stores, which sell Macs, iPads, iPhones and iPods, and have been a major success story in the promulgation of the Apple franchise (and much emulated, too).

And we are still waiting for someone to come up with the same order of magnitude slowdown from one quarter to the next (and a profit drop-off of similar size) for any retailer, no matter what they do.

JM

Wasnt 5th Ave store closed for repairs during the summer as well extended time for Hurricane Irene? Not sure if it accounts for all of the decrease, but may explain some considering that 5th Ave store is one of the most heavily trafficked

Jeff, your analysis seems to have missed the obvious.

Apple Iphone 4 was released June 24, 2010, benefiting Q2 2010 results. Iphone 4S was not released until Q4 2011.

What other reason do people have for visiting Apple Stores than to buy the marquee products? This is a pretty obvious point for you to overlook.

What's happening is your numbers and comparisons are flawed.

Apple’s retail stores rocketed to its own record of 1.1 million Macs sold, up 25 percent from the same period of last year.

The stores also hosted a record number of visitors in the quarter, 77.5 million compared to 74.5 million for the same quarter of 2010 – up 4%. The avg. number of stores opened increased 11% in this period.

Q3 2011 (ending June) visitors were 73.7 million vs. 60.9 million – up 21%. The avg. number of store opened increased 13% in this period.

Overall, the retail stores posted $3.6 billion in sales, just off the record $3.85 billion of last year’s holiday quarter(Q1 2011).

It's obvious that the difference is that Q4 2010 had a new iPhone 4 and Q4 2011 had no new product. That's a HUGE handicap for the 2011 Q4 retail numbers. Still Q4 2011 beat Q4 2010 by many metrics.

Also, Cook mentioned that many stores are being expanded because they are hitting maximum capacity. This is reflected in the slowing growth in visitor numbers and thus sales. If you've ever been to an Apple store you would know this.

Get a grip.

#1. The economy has had some impact on "walk in" sales all over. Apple is no exception.
#2. But there is also a "how many more can we stuff into our stores" factor to be considered. I, for one, was absolutely amazed at the traffic in both the Center City Philadelphia and Delaware (Christiana Mall) stores (I live in the Philly suburbs about 5 minutes from the Suburban Square store). The Del. store, newly moved from a much smaller locale in the mall, is stuffed to the walls the 3 times I've visited despite a3X increase in size factor. I saw many potential customers just stand outside, shake their heads and mutter about coming back later to see if the crowds went down. So perhaps they decided to ….
#3 Buy online. With the price of gas this past quarter, I for one have been buying more online for items I know about without having to visit a physical location which brings me to
#4. Apple sales are up. The lack of a newer iPhone has certainly taken the shine off of Apple's possible sales increase not being what it could have been. In an overall view between Apple's victories in its patent 'wars' with Samsung, the strength of iOS 5 and the iPhone 4s' internal hardware improvements along with Siri (which, IMHO, is a huge step especially for us older folks who might be otherwise stymied by all the bells & whistles) and the hopeful economic rebound, I disagree with your assessment that there is something amiss with Apple's retail outlook.

explanation is quite simple.

sequential quarter change for cpu unit in retail was 43%
year over year it was 25%.

So basically ipad and macbook air
is eating into the high priced macbook pro they were selling.
Plus there was freeze of iphone and ipad sale in September because everyone was waiting for either iOS 5.0 or iphone 4s. where as Mac sales were a record so most of that went to schools and collages.

The quarter tanked because of the iPhone delay of three months, simple. Everyone knew a new phone was coming so they waited to buy, including in the stores. 4S sales will carry over to Q1 and Apple will have a record quarter, as will its stores.

You have to learn how to compare the right set of numbers from one year to the next. Furthermore, Apple Retail outlets have more than sales to offer. I have rarely bought major items at an Apple Store as I prefer customization… I order online. But my visit to the Apple Store is an important part of my purchase decision as I like to try before I buy. I also buy Apple knowing that there are several Apple Stores nearby if I ever need service or assistance. There is more to a brand than sales.

Apple is humming along as usual, had a strong quarter, with much more to come. The only problem is the hype generated by blogger analysts. Apple failed to live up to their fantasies, so the sky is falling? More likely this is part of a network of blogs designed to drop the price of AAPL so that some investors can scoop up more. The price always roars right back, in case you hadn't noticed.

We publish the last "Anonymous" comment by way of demonstrating exactly the kind of "Yahoo Message-Board"-type commentary we don't normally publish, as it is uninformed and therefore useless. This is not a message board for stock promotors, and future such commentary will stay in the "spam" folder.

The column, by way of reminder, dealt with Apple's retail store sales and Wall Street's standard way of ignoring interesting developments until they get smacked in the face when those developments become a headline. Like, for instance, the fact that the 4S came out after the quarter-end. (Did nobody on Wall Street realize the iPhone 4S was coming out after the end of the quarter? Based on the reaction, apparently not).

The column itself was based on data provided by Apple, not on stock prices, investor emotion or price charts.

And, by the way, I'm still waiting for somebody to show a retailer whose sales went from up 36% to up 1% in one quarter, whether they sell smartphones or Cabbage Patch dolls.

JM

Granted, there were some wild things going on at the time, but I think I found one. Lululemon Athletica in Q3 2008 was up 34.1% y/y and down .1% the following quarter. That's the best I have found, however, I am sure someone who has been around longer than I have could find another retailer in a better economy.

So put an asterisk next to Lululemon.

I am a Mac faithful since 1987 – love the products and kinda liked the store at first but I have spent $5,000 on Apple products (iPhone, computers, etc…) this year with apple resellers. The sales staff at the Apple store leaves a lot to be desired. They can't train enough intelligent people to sell the product. Just bought the 4S at radio shack. Unless u wait for genius bar you are just dealing with college kids that think Apple is a cool place to work.

The answer is quite simple and was already given by Troy Peterson, but you've ignored it.

1% goes to 37% yoy if there was $1.3B more in revenue. 2m iPhone sales equals $1.3B. Apple's 4Q10 was a major launch quarter for iPhone 4 (in the countries where Apple has most of its Retail Stores), whereas Apple's 4Q11 was its annual transition quarter – the quarter before an iPhone launch, where iPhone sales droop (especially in those handful of countries where the launch is about to occur, and where Apple has most of its Retail Stores).

The only retailers that have such a big swing would be retailers with revenue that is highly dependent and thus highly skewed by 1 or 2 products. Like Apple is with regard to iPhone, which in CY2Q11 and CY3Q11 was around 50% of Apple revenue.

Kevin

I know the real reason, but I cannot divulge the answer publicly. And you wouldn't understand it if I did tell you. JM knows. – Tahoe Kid

Jeff got it. Aapl could have been channel stuffing and that's why overall numbers were not so bad. Store sales don't lie

Colin P demonstrates how hard it is to find a retailer that hit a wall so quickly, but he came up with an excellent example in LULU during the financial crisis. The fact that doing so is not easy is the point.

Kevin, who logged on as "Anonymous," provided a useful but incorrect math lesson by adding back $1.3 billion in lost iPhone sales and coming up with 37% y/y growth. This ignores the fact that only about 10% of Apple's sales come from the retail stores, and those sales are heavily weighted towards Macs (which makes sense given Macs are a product customers want to play with before buying). Furthermore, a good chunk of phone sales are through carriers.

Therefore, assuming 10% of the $1.3 billion in lost iPhone would have been through their own retail stores, the sales gain would have been 3 or 4%, which is, still, a mighty drop from 36%…and a head-scratching number.

JM

Another contributing factor might be that there are now more authorized outlets, especially in Asia, and Apple products are released there more quickly. In the past, there have been extensive purchases at Apple retail stores for the gray market. The newer Asian stores (E.g., Hong Kong) would not have shown up yet in these statistics.

I recently found your blogf as result of a Twitter post by Her Greenberg.

Subsequently, I posted a comment on your site, with a linking back to an entry on my's article on Apple and STeve Jobs.

I was stunned by the number of your readers that used that link. But moreso with how engaged they were once they arrived at my site.

Your average reader stayed for nearly 8 minutes.

Thanks for that opportunity and I certainly enjoyed browsing through and reading your posts.

Bzzt. Wrong. Retail sales are not heavily weighted towards Macs. In the last quarter, Retail sold 1096m Macs at ASP of about $1280, which is about $1.4B, which is less than 1/3 of Retail revenue. Over the last year, Mac sales at Retail have been about $1B per quarter, which is anywhere from 25% to 33% of Retail revenue.

It's clear that the iPhone transition likely cut about 6-9m in iPhone sales in the last quarter, based on previous iPhone sales trajectories. It wouldn't be a stretch to say that 2m of those sales would've occurred at Apple Stores. At this point, you should just go and read Horace Dediu's response at asymco.com.

Kevin

John Waddell makes a good point. We all remember the stories of people from (insert-name-of-country-here) buying hand-over-fist at Apple stores whenever a new product came out that wasn't available in (insert-name-of-country).

And while I love Neil's idea that the guy's hand is tired of clicking…Apple uses ShopperTrak, a hi-tech video method of counting.

Finally, the notion of "channel-stuffing' is not what we were getting at. Since the turnaround, Apple's distribution has been tightly controlled, and days-of-inventory in the channel are always called out on the calls.

JM

That's an interesting point. Your challenge assumes there are many retail stores out there that have a similar product structure and mix as the Apple store. Good luck with that.

Have you read asymco's response to your quest?

Joe

Jfutral misses the point: the point is to name a retailer of any product–smartphones, computers, baseball cards, toys, clothing, anything–that has had such an abrupt fall-off in sales as Apple's retail stores did this quarter, even adjusting for the iPhone 4S pushouts.

You will be hard-pressed to find one, and that's what makes the data point so interesting. And it hasn't happened at Apple since the iPhone cycle began.

JM

From Apple's datasummary sheet:

1096m Mac units sold at Retail Stores * ASP of $1282 = $1.4B.

Apple Retail revenue of $4.884B.

Equals 28.5%.

Whose numbers are you using?

Kevin

It hasn't happened at Apple previously because this is the first time they've moved the iPhone's main launch quarter out of the CY 3Q.

Kevin

Perhaps Apple is indeed up to something… something like a deliberate shift from brick&mortar retail to retail that will be affiliated with it's iCloud (not that Apple-stores have any brick & mortar about them). Changes from Ron Johnsons's departure notwithstanding, i find it hard to fathom that such a small change in Y/Y store sales in the wake of strong overall Y/Y sales is not (at least in part) by design. Afterall this is Apple (and Steve Jobs) that you're talking about.

It's obvious a tremendous amount of planning went into the integration of iCloud with Apple, and maybe that is in part what you're witnessing with the change store-retail numbers.

No, I get the point quite well. My point was that unless you find a retailer that has a similar product relationship, even if you find a similar set of numbers, it won't mean a thing. It would be like comparing numbers between Sony Stores and Bed, Bath, and Beyond. It's meaningless, as is your exercise. And that is even assuming you have done enough homework for your numbers to have any meaning, even when just looking at Apple. And Dediu over at asymco.com shows you haven't.

Joe

Kevin: I'm using $3.6 billion. From the earnings call– "I'd now like to turn to the Apple retail stores. Revenue was $3.6 billion, an increase of 1% over the prior-year quarter…"

Jfutral: No, you don't get the point. The point is, no other retailer in our experience of following retailers for 25 years has experienced a drop-off like that, period. As such, it's a) interesting, and b) potentially meaningful. As for this other character you keep bringing up, we're not debating him or anyone else. This is just data.

JM

You do't get it. Insufficient data for any meaningful derivations.

The Apple store carries all of what, 5 products—laptops, desktops, iPads, iPods, and iPhones. That's it. You don't even have to go to the B&M to buy software, you can download it via the App Store ™.

I don't think anyone can find another retail store driven by such a small product line-up either.

But that is just Wittgenstein's Net. Throw a net with a 2" weave in the water and all you find is fish 2" or bigger. Then you conclude that there are no fish smaller than 2".

http://www.asymco.com/2011/10/21/the-surprising-growth-in-apple-retail/, but only if you are REALLY interested in the validity of your (shallow) conclusion. Otherwise, you are just click bait that I fell for. SIlly me.

Joe

Well the first chart is a beautiful chart of data we already knew, i.e. (as a retailing analyst would say) Apple's retail stores are "coming up against strong comps," and hence the slow-down. Yet the chart does not change the fact of the slow-down itself.

The second chart, which is even prettier, explains the slow-down by visually demonstrating, as its author says "there is a strong relationship between iPhone sales growth and store growth," which we also already knew.

So both charts demonstrate what was already known, and neither chart explains the decline in profitability of the Apple retail stores for the first time since the financial crisis of 2008/9. Hint: declining store profits tend to happen when revenues fall below plan.

JM

A few reasons why retail store revs/traffic slowed

1. Apple retail store traffic increases when new products are launched. There were no new products in Sep qtr

2. Existing products can be bought from any retailer (bestbuy, amazon etc.) which compete for traffic in quarters where there is no new product

3. Existing product availability increased in the carrier channel. This also lead to traffic competition.

In all, Jeff, you bring up valid points, but at this point this is transitory and does not indicate the end of Apple retail.

M

M

Anonymous: all valid.

But what tech analysts don't get here is this is not a condemnation of Apple as a whole…this is about Apple's retail store base.

And when sales productivity hits this kind of wall–for any reason, whether it's more alternative channels, online sales, lack of refreshed product–it matters.

Hence the 26% profit drop in the stores: that's a big decline (more than double the drop experienced during the financial crisis).

As Apple adds more stores on top of less-productive stores (21 new stores in the last quarter alone), it raises interesting questions.

JM

Jeff, M/Anon again

I would also add

4. carrier promotions in Sep qtr, with 3GS for zero, increasing traffic to carrier outlets

Also, i think looking at Apple retail store sales gives an incomplete picture, as 1-time retail store purchases often lead to a platform conversion for a customer, following which repeat sales are usually online.

Apples retail store success is laudable in the context of failures from Nokia, Sony, Dell, Microsoft etc. Many "adults" do not like the lack of registers/lines, inability to pick a product by oneself, genius reps … but the "young" find the ability to touch/play appealing .. leading to a platform conversion

Any rate, the retail traffic dynamics are a sideshow for Apple. Keys remain
(a) Product roadmap ahead
(b) China penetration potential
(c) low end iphone potential in EM

For Q4 we know US will do 11-12m. If China can do 4m+ and 3gs can do 2-3m in EM, then add Europe, Asia we get to > 31m by my estimates

Longer term, with US smartphone penetration @ 40%, and < 20% in various EM, stories of apple's demise/slowdown are vastly exaggerated

M

Jeff, I'm unsure if this is your point or not, but as a market observer for decades my conclusion has been and will always be (especially since the advent of the internet) that building stores to hawk your own products exclusively while allowing (or not) others to also sell your products is ALWAYS too expensive in the long-run. We've seen this movie countless times and it has never worked for technology. I'm stunned that they even bothered to try this in any manner short of a handful of key, marquee cities where the hype may carry the marketing benefits. I hope all stores are leased not owned. I still await a car maker to adopt the Dell model (own little, but source well) and offer the test drive models at a some other distributor that is already in existence.

As a followup to my prior post – Carmax would fit the auto maker distributor model for a Dell-like auto company while the Gateway stores and their ill-fated sort may someday be the path of Apple stores. I know that the sheer volume of comments here speaks to the volume of support for Apple, but really, as the product hits slow and the lines age, the store will lose its "coolness" factor and then the cost structure will dictate closing stores. Maybe that's 10 years down the road, but won't be surprised if it is sooner..just sayin. (my yahoo! message board dialect). Keep up the excellent site Jeff.

Another example (of admittedly questionable comparability) would be Pandora, the jewellery and not the online music business (PNDORA DC):

Sales growth
Q1 2011: 41% yoy
Q2 2011: 3.65% yoy

The share price was decimated as a resulted of this and other issues. It is worth bearing in mind that the vast majority of its business is wholesale BUT they have a very close relationship with their mom&pop retailers, many of which carry only the Pandora brand.

Eddy

Another example (of admittedly questionable comparability) would be Pandora, the jewellery and not the online music business (PNDORA DC):

Sales growth
Q1 2011: 41% yoy
Q2 2011: 3.65% yoy

The share price was decimated as a resulted of this and other issues. It is worth bearing in mind that the vast majority of its business is wholesale BUT they have a very close relationship with their mom&pop retailers, many of which carry only the Pandora brand.

Eddy

Michael makes a good point about the viability of the retail model, and it's the reason I thought the stores were doomed to fail when they were first opened. Turned out to be very wrong, for reasons I am writing about now, and I would argue in Apple's case the stores and their prevalence help the shift in market share away from Windows…they make it so easy to get help/advice.

And Eddy shows how hard it is to find a slowdown of comparable magnitude!

JM

This is totally off the subject, but… have you seen how much Netfilx has spent to buy back stock over the last few years? I spent some time working on the name after this blowup, but I was amazed by the percentage of cashflow that's gone to buybacks. What a waste.

Jeff, regarding your discussion below with Kevin:

"…provided a useful but incorrect math lesson by adding back $1.3 billion in lost iPhone sales and coming up with 37% y/y growth. This ignores the fact that only about 10% of Apple's sales come from the retail stores, and those sales are heavily weighted towards Macs…"

One could make the argument that "lost" sales in iphones were much higher than Kevin's estimate of 2m. Sequential growth in ipads (of course in a different phase of the product cycle) was 20% vs Q3 in unit terms though ipods were down 12% (using data from latest 8k – unaudited, of course – link below).

Iphone units could have easily been 4m units higher, which would have represented what has become for Apple modest growth vs Q3. The share of retail (out of total sales) was, to be precise, 12.7% in Q4. $2.4bn of sales came from itunes, software and other services, which are generally not transacted through the physical stores. Adjusting for this, retail accounts for probably closer to 14% of "hardware" sales. I have not seen any estimate as to whether iphones represent a larger proportion here. Using the 14% of the "lost" $2.6bn in sales (4m x ASP of $650), retail sales would have been $364m higher in Q4 representing 10.7% yoy growth. Still a clear slow-down but less dramatic. Moreover, the 4m estimate COULD be too low as well and iphones could be taking a larger than proportionate share in stores.

Thoughts on this would be very welcome.

Eddy

http://files.shareholder.com/downloads/AAPL/1474820948x0xS1193125-11-273826/320193/filing.pdf

Indeed. The 4S is a hit. Q1 should be gangbusters in iPhones, which is a good thing being the highest-margin product in the joint. iPads not so perky but okay. China gets the 4S in a week or two…

JM

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