Since last month's iPhone 5 release, a lot of skepticism and pessimism have fallen on Apple (NASDAQ:AAPL). The skepticism and pessimism have not spared Apple's iconic, strategic and yet smallest business segment: its retail store operation. To address some of the concerns, I have pored over Apple's regulatory filings since fiscal year (FY) 2001, when Apple opened its first retail store, and compiled 11 charts that I hope should reveal the trend in this business segment.
Retail Store Openings
Chart 1 indicates the number of retail stores Apple has opened (cumulatively) as of the end of each fiscal year since FY 2001. The final FY 2012 store number will remain unavailable until later this month when Apple releases its Q4 and FY12 earnings. So, the number for FY 2012 in the chart is an estimate based on the company's store target released in its previous filings.
As you can see, Apple is still expanding its retail footprint steadily. But it has slowed down its pace in the U.S. while maintaining rapid international expansion. That makes a lot of sense if you think about it. In mainland China, for example, with a population of 1.3 billion Apple has just opened its fifth retail store last month. And customers started to queue for the store opening at 10 p.m. the previous night!
Retail Sales and Operating Income Per Square Foot
These are shown in Chart 2 below. For each fiscal year, I have used average square footage to calculate the net retail store sales (revenue) and operating income per square foot. For FY12 the per-square-foot data were for the past four quarters (NYSE:TTM) ending 3Q12. As you can see, net sales per square foot almost reached the $6,000 mark for the past twelve months (ending 3Q12) at $5,936. Net operating income per square foot came in at $1,510. Net sales will likely break the $6,000 per square foot mark for FY12 and continue to climb in the next quarter (1Q13).
Retail Operating Margin
Chart 3 shows the retail operating margin for the past twelve years. Again since FY12 is incomplete, so I have used past four quarters (ending 3Q12) in its place. Retail operating margin remained negative until FY04. Thereafter, it has generally kept improving.
Chart 4 below is the same as Chart 3 except it started with FY03 to make recent trend easier to be discerned. Retail operating margin hit an intermediate peak at FY09. But it improved again in the past four quarters, which registered an all-time high of 25.4%. For the first nine months of FY12, the retail operating margin fared even better, reaching 26.5% (not shown).
However, retail operating margin for 3Q12 (not shown) came in at only 21.3% mostly because consumers worldwide postponed iPhone purchases in anticipation of the new iPhone 5 model released last month. You can count on the retail operating margin to improve in 4Q12, but particularly in 1Q13 ending this December.
Retail Revenue and Operating Income Compared to Total
Chart 5 compares net retail revenue to total net revenue for the past twelve years. As you can see, even though net retail revenue has increased over the years, Apple's total net revenue has grown at an even faster pace. Again, I have used the past four quarters' data (ending 3Q12) in place of FY12.
The same can be said for retail operating income, shown in Chart 6.
Chart 7 plots net retail revenue as a percentage of total net revenue, and retail operating income as a percentage of total operating income. It can be seen that, in the first few years, retail stores contributed an increasing percentage to total revenue and operating income. However, as Apple's total revenue and operating income grew at a faster pace than retail revenue and operating income, respectively, the latter's percentage has been in constant decline in more recent years.
The comparison above might have proved the success of Apple's retail strategy. Retail stores are not just points of sales. Through superior customer service, education, and image/brand building, they are helping drive the company's overall sales in other channels which grow even faster than the direct sales in retail stores.
Retail Store Capital Expenditures
Chart 8 plots Apple's CapEx in retail stores, total CapEx, and operating cash flow for the past twelve years. Note that for FY12, the data are for the first nine months only.
As can be clearly seen, Apple's operating cash flow has been growing at a faster pace than its retail CapEx for the past few years. Therefore, Apple's current retail CapEx looks like a drop in a bucket when compared to its monstrous operating cash flow. OK, it is not quite a "drop in a bucket." But the current retail CapEx is surely a pocket change compared to the operating cash flow.
Chart 9 plots retail store CapEx as a percentage of the operating cash flow, and the same as a percentage of the total CapEx. It should be clear that the retail store CapEx has been on a constant decline as a percentage of both the total CapEx and the operating cash flow. For the first nine months of FY12, retail CapEx represented only 1.2% of operating cash flow. Do you see my "pocket change" analogy now?
When you plot the cumulative retail store CapEx since inception (2001) versus the cumulative operating cash flow in the same period, you get Chart 10. As of June 2012 (end of Q3), Apple has invested a total of $3.3B in retail stores. Note that this represents only 7.9% of the most recent three quarters of operating cash flow. And it is only 2.6% of the cumulative operating cash flow so far since 2001.
Chart 11 plots the cumulative retail CapEx as a percentage of the cumulative operating cash flow since 2001. Again note the declining trend.
The retail store CapEx charts above along with the huge international potential mentioned previously should serve to quell concern among some investors that Apple has over-expanded its retail store operation.
Since 2001, Apple has opened nearly 400 iconic retail stores both in the U.S. and internationally. Both sales and operating profit have grown in these retail stores over the years. However, these retail stores have also helped driven the company's overall sales (that are growing even faster) through superior customer service, education, and brand building. There is a lot of room for the retail operation to grow particularly internationally. And with its monstrous capability in generating operating cash flows, Apple can now expand its retail store operation with comparatively minimal capital expenditures.
Disclosure: I am long AAPL.