Memo To Apple: Prepare For Weak Holiday Sales

Nov.26.13 | About: Apple Inc. (AAPL)

Numerous seasoned retail analysts have already labeled the looming 2013 Holiday Season as the worst sales event of its kind since 2008. In 2008, Americans were coping with the fallout of a credit crisis that was the epicenter that jarred the real estate and stock markets into major corrections. This year, American consumers have been left to navigate after affects of a government shutdown, alongside the ongoing launch of The Affordable Health Care Act, or Obamacare. Earlier this year, Social Security payroll taxes increased from 4.2% to 6.2%. The additional taxes are most likely to affect the buying habits of middle-income Americans. Prospective Apple (NASDAQ:AAPL) customers are now in the market for value, instead of performance, or whatever hipsters may believe to be cool.

A recent report out of investment bank Morgan Stanley (NYSE:MS) warned retailers to 'expect coal' throughout this 2013 Holiday Season. Morgan Stanley analysts foreshadowed a slight 1.6% year-over-year increase in comparable store sales (Morgan Stanley estimates exclude J.C. Penney (NYSE:JCP)) through this Holiday Season and fourth calendar quarter. According to Morgan Stanley, the projected scant growth in sales is solely due to an expansion of the population, rather than heightened consumer interest. The National Retail Federation did anticipate that gift spending per person would actually decline by 2.5% to $536.85 during the 2013 Holiday Season. Most likely, this coal-in-stocking undertow will also drag down Apple results.

The Apple Store

Experienced Apple watchers, such as journalist Philip Elmer-Dewitt and trader Andy Zak, have noted a subtle, yet very important shift within the earnings projections coming out of Apple brass. As recently as 2008, trader Andy Zak would pit amateur prognosticators against professional analysts, in an earnings smackdown game to project financial results for Apple. The late Steve Jobs was then famous for his near ridiculously low sales forecasts, which positioned Cupertino to under promise and over deliver into what was often a frenzied atmosphere for trading Apple securities.

On August 24, 2011, Tim Cook succeeded Steve Jobs, as Apple CEO. Tim Cook, operations man, began to manage Apple with more of a nuts and bolts approach, relative to Jobs' reality distortion field. Cook's leadership style is similar to that of another leading man in San Antonio named Tim. Tim Duncan is often hailed as the greatest power forward of all time, due to his professionalism and efficient mastery of the fundamentals on the basketball court. Current Apple watchers must be willing to acknowledge the old cliché that Tim Cook means what he says and does what he says. Philip Elmer-Dewitt opines that Apple now telegraphs 'realistic guidance.'

Be advised that the first quarters of Apple fiscal years typically end during the last full week of December, which corresponds with the end of Christmas, but does not include New Year's sales activity. This 2013 Holiday Season will also be relatively short, because a quirk in the calendar has this Thanksgiving falling late in the month, on November 28. In a recent conference call, Tim Cook announced that he was looking forward to a "really great" shopping season. According to Cook, "really great" would undergird an Apple forecasted range of $55 billion to $58 billion in Q1 2014 revenue. Last year, Apple topped out at $54.5 billion in Q1 2013 sales. Apple posted $13 billion in net income during both Q1 2013 and Q1 2012. By many accounts, the Apple Revolution and its associated ecosystem components are transitioning towards product maturity within the business cycle.

The Apple iPad Christmas

Tim Cook has fashioned the Apple iPad as the straw designated to stir the drink of Apple Holiday Sales. In prior years, the Apple iPad and its annual upgrades were launched during the second calendar quarter and springtime months. This year, the iPad Air and second-generation iPad mini updates hit shelves earlier this November, in anticipation of the 2013 Holiday Season. The Apple iPad Air may be most notable for its svelte physical specifications and powerful 64-bit A7 microprocessor. Apple engineers have claimed that the A7 is the new engine powering an iPad tablet machine that runs twice as fast as its predecessor, while still preserving a similar ten hours worth of battery life. Research firms Fisku and Mixpanel have already indicated that iPad Air usage rates have been significantly higher than prior iPad tablet models. Fiksu claimed that 0.88% of owners used their iPad Air during its opening weekend. This use compared quite favorably to the iPad 4 and iPad Mini, which were associated with respective 0.15% and 0.22% opening weekend usage rates, according to Fiksu.

Be advised that the staggered release schedule of the 2013 iPad upgrade makes for difficult sequential and year-over-year financial comparisons. On August 5, 2013, research firm IDC went so far as to blame the second calendar quarter slowdown in tablet shipments upon the delayed iPad launch. Tom Mainelli, IDC research director of tablets, then said, "A new iPad launch always piques consumer interest in the tablet category and traditionally that has helped both Apple and its competitors."

On October 30, 2013, Apple filed its Form 10-K with the Securities and Exchange Commission, for its 2013 fiscal year ended September 28, 2013. Apple reported iPad net sales of $19.2 billion, $30.9 billion, and $32.0 billion, for fiscal years 2011, 2012, and 2013, respectively. On a quarterly basis, Q4 2013 iPad sales revenue declined by 13%, in comparison to the prior year. In either event, recent iPad sales figures appear as a sudden downshift away from the torrid growth rates above 50% of these machines between 2010 and 2012. Tim Cook has hitched the Apple Holiday sales wagon to iPad at the same time that Android and Windows machines are closing technical gaps within this market. The Amazon (NASDAQ:AMZN) Kindle begins at $69, as a standalone e-reader and value play for cost-conscious consumers.

The Bottom Line

The Apple Revolution has matured. Going forward, traders may expect Apple to operate along similar lines as personal computer twin engines Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC). Ongoing commitments to return greater percentages of capital back to shareholders through stock buybacks and dividends may signal that Apple management acknowledges the writing on the wall of market saturation. On April 30, 2013, Apple sold bonds to raise $17 billion in cash. Bloomberg then suggested that the proceeds from this bond sale would help bankroll an ongoing plan for Apple to return $100 billion to shareholders via dividends and stock buybacks, by the end of 2015. Apple was able to borrow at rates ranging between 20 and 100 basis points above comparable Treasury securities. The move helped Apple to avoid taxes upon the repatriation of overseas cash.

Late last month, in October, Carl Icahn revealed that his affiliates controlled 4.7 million shares of Apple, through Icahn Enterprises L.P. Icahn, 77, has leveraged Web 2.0 as a tool to reach out to what he feels may be a sympathetic audience of fellow shareholders. Carl Icahn's Shareholders' Square Table website has compared corporate governance to feudalism, where chieftains have barricaded themselves away from serf-like shareholders, with the help of shrewd lawyers and investment bankers. On this site, Icahn went public with his letter to Apple CEO Tim Cook. Over dinner, Carl Icahn had proposed an ambitious plan for Apple to execute a tender offer to immediately buy back $150 billion worth of outstanding stock at $525. Icahn's aggressive activism is another signal that Apple lacks real growth opportunities for its cash pile.

On November 22, 2013, Apple closed out the trading session at $519.80 per share. Wall Street traders then valued Apple at $467.6 billion, in terms of market capitalization. The stock now trades at an estimated 12.65 earnings, after accounting for Apple's $37 billion in fiscal 2013 net income. The prior year, Apple businesses generated $41.7 billion in net income. A weak 2013 Holiday Season would foreshadow another year of flat earnings statistics at Apple. The stock market functions as a pricing mechanism to discount future growth, rather than immediate balance sheet snap shots. As such, the $146.8 billion in cash and securities now lying fallow on the Apple books shall not be mistaken for game changing innovation. Apple may very well begin to trade like a utility through 2014.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.