Apple Retail Store Profitability Analysis

Oct. 8.12 | About: Apple Inc. (AAPL)

There was a Seeking Alpha note by Stephen Ryan on Apple that had a limited analysis of the stores profitability (it only used the third quarters of fiscal 2011 and 2012) with a concern that its operating profit was declining on a per store basis and that its storefront liabilities will eventually become a burden on cash generation from operating activities.

I believe a better way to track Apple's (NASDAQ:AAPL) retail stores profitability is to look at it on a trailing four quarter basis per store. This helps to take out the revenue and operating profit variability from new product launches. I have created two tables below that demonstrate operating profit per store has been growing nicely.

The table below has

  • Total stores revenue
  • Percent of total company revenue
  • Year over year growth in dollars
  • Year over year growth in percentages
  • Sequential growth in dollars
  • Sequential growth in percentages
  • Operating margin
  • Operating income

2011

2012E

Q1

Q2

Q3

Q4

YEAR

%

Q1

Q2

Q3

Q4E

YEAR

%

12/31/10

3/31/11

6/30

9/30/11

TOTAL

chg

12/31/11

3/31/12

6/30

9/30/12

TOTAL

chg

Revenue ($M)

$3,847

$3,191

$3,505

$3,584

$14,127

44%

$6,116

$4,399

$4,084

$4,200

$18,799

33%

% of Total Revenue

14.4%

12.9%

12.3%

12.7%

13.1%

13.2%

11.2%

11.7%

11.2%

11.9%

Y/Y Growth ($)

$1,876

$1,508

$927

$18

$4,329

$2,269

$1,208

$579

$616

$4,672

Y/Y Growth (%)

95.2%

89.6%

36.0%

0.5%

44.2%

59.0%

37.9%

16.5%

17.2%

33.1%

Sequential Growth ($)

$281

($656)

$314

$79

$2,532

($1,717)

($315)

$116

Sequential Growth (%)

7.9%

(17.1)%

9.8%

2.3%

70.6%

(28.1)%

(7.2)%

2.8%

Operating Margin

26.2%

24.5%

22.9%

21.0%

23.7%

30.3%

26.1%

21.3%

21.0%

25.3%

Operating Income ($M)

$1,006

$782

$802

$754

$3,344

41%

$1,854

$1,149

$868

$882

$4,753

42%

Click to enlarge

What the table above shows is that Apple's stores revenue has been increasing strongly, but declining as a percent of total revenue from 13.1% in fiscal 2011 to an estimated 11.9% in fiscal 2012 (one reason being the huge growth of China which only has five stores). The stores' operating margin has been in the 22% to 25% range since fiscal 2008 and will probably increase in fiscal 2012 vs. 2011.

The table below has

  • Number of Apple stores
  • Trailing 4 quarters of revenue per average store (beginning and ending quarter number of stores)
  • Year over year growth of the trailing 4 quarters of revenue
  • Trailing 4 quarters of operating income per average store (beginning and ending quarter number of stores)
  • Year over year growth of the trailing 4 quarters of revenue
  • Delta of the two growth rates of revenue and operating income

2011

2012E

Q1

Q2

Q3

Q4

YEAR

%

Q1

Q2

Q3

Q4E

YEAR

%

12/31/10

3/31/11

6/30

9/30/11

TOTAL

chg

12/31/11

3/31/12

6/30

9/30/12

TOTAL

chg

# of Stores

323

323

327

357

357

13

361

363

372

382

382

7

T4Q Revenue/Store

$39.1

$42.8

$44.4

$43.3

$43.3

27

$48.9

$51.0

$51.1

$51.4

$51.4

19

Y/Y Growth (%)

49%

60%

49%

27%

25%

19%

15%

19%

T4Q Oper. Inc./Store

$9.7

$10.7

$11.0

$10.2

$10.2

25

$12.5

$13.2

$13.0

$13.0

$13.0

27

Y/Y Growth (%)

45%

60%

53%

25%

29%

23%

18%

27%

Delta % Rev. vs. OI

(4)%

(1)%

3%

(2)%

4%

4%

3%

8%

Click to enlarge

What it shows is that the retail stores have been consistently increasing their revenue and operating income per store when viewed on a trailing four quarter basis, and have also been increasing their operating income faster then revenue. Again I believe this is a better way to view the stores' profitability, due to the different quarters that new products are introduced.

Lease commitments

As of June 30, 2012, the Company's total future minimum lease payments under non-cancelable operating leases were $4.1 billion, of which $3.0 billion are related to leases for retail space. Since the terms range from five to twenty years with the bulk of them ten years the amount that Apple is committed to is about $410 million per year.

Since Apple's retail stores earned over $3.3 billion in operating profit in fiscal 2011 and over $3.8 billion, up 49% year over year, for the first three quarters of fiscal 2012, the amount that the company is on the hook for is minimal (and is essentially covered by current revenue already).

One other reason that Apple's stores are so profitable is that most (if not all) pay a flat rent and do not pay a percentage of revenue. Therefore as revenue per store increases, more of it flows to the bottom line.

Numbers aren't the only key feature of the Stores

One of the other key components to Apple's retail stores is the service they provide. You can go into a store and ask questions or set up an appointment to get more in-depth help. No other technology retailer can match what Apple has to offer.

Target price of $835

The bottom line is that Apple's stores are very profitable, have been increasing their profitability, and I would expect a blow-out December quarter with the launch of the iPhone 5 and what looks to be an iPad mini.

With the stock trading at about 11x my calendar 2013 EPS estimate of $60 and with approximately $200 in cash per share at the end of 2013, I believe the shares are undervalued. My target price is $835.

Disclosure: I am long AAPL. 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.

Additional disclosure: My estimate, ratings and/or analyses of a stock only represent my personal view on the stock and/or my assessment on the probable movement of the stock price in the next 12 months. They are by no means a guarantee of performance on any long or short trades on a stock and should not be relied upon solely for buying or selling a stock. Every investment, no matter how compellingly appealing it seems, involves risk. Investors should do their own due diligence and consider personal risk tolerance, preferences and needs when making an investment or a trading decision. All materials are subject to change without notice. Information is obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.