A Three-Hour Tour – I Mean, A Three-Year Window
As you probably know, Apple recently decided to make its reporting more accurate – and more inscrutable – by adding the results from its Retail operations directly into the revenue/operating margin results per revenue geography (which remains Americas, Europe, Greater China, Japan, and Rest of Asia Pacific). So each revenue geography’s results are now an actual reflection of the full results in that geography, with Apple’s benefit being that it will never again need to disclose on a SEC filing how Apple’s Retail Stores performed (sales/operating income) as their own segment.
The “tradeoff” for Apple was an apparently required reconciliation – and so Apple released three years’ worth of “before and after” quarterly summary data (fiscal year basis), including “corporate expense reallocation” and per-revenue-geography Retail revenue and operating income results.
It’s a one-off, but interesting nonetheless, and may have some value for the “advanced” and/or institutional AAPL analyst community (which does not count yours truly in those subsets). For anyone who might have been estimating Apple’s Retail revenue and operating income in each of Apple’s five revenue regions (or even more in-depth), the reconciliations are a must-read and a useful, though time-limited, check against their financial modeling.
Revenge of the Attack of Mav’s Segment Revenue/Operating Margin Chart, Retail Edition
Since I’ve been maintaining an exceedingly humble ex-Retail chart, it was relatively easy for me to import the Retail segment revenue, Retail operating income per revenue geography, and process/adjust accordingly.
To the 25 or so of you who cringe at the memory – and new readers – apologies in advance. I know, in some ways it’s less readable than my now-defunct ex-Retail operating margins chart. But while it’s dense, it’s also “compact”. Hey, some charts just aren’t suited for a quick read.
(BUT, by special request, I decided to break out data by revenue geography, so I’ll have individual segment charts after this.)
Chart (you really should click for full size/open in a new window) and quick takeaways follow. (One interesting thing to point out right away – as reported by Apple, FQ1 2012 represents the zenith of Retail operating margin for all revenue geographies in this interval.)
So what we’ve got here, covering Apple’s full three-year reconciliation (FY 12-14), probably never to be seen in this level of detail again, are:
Left side Y-axis, stacked bar chart, Apple Store revenues in millions. I know, I know, what’s with Japan’s results looking “out of order”, but hey, it kinda works. And I did add generally-readable quarterly data points per region (also in millions).
Right side Y-axis, line segment chart, Apple Store operating margin. Yes, not only are operating margins considerably lower than Apple’s corporate average (retail operation overhead and all that), two of the data points are below zero.
Takeaways in Time
Some very quick takeaways (keep in mind it’s only 12 quarters) – I’ll leave it to the experts for the expert analysis.
Retail is seasonal, similar to Apple’s total quarterly revenue, but not reflective of Apple’s overall growth in all situations. Which is a perhaps-euphemistic way of saying, there’s quarters (say, FQ2 2014, FQ3 2013 and FQ3 2014) where overall Retail segment revenue didn’t grow at all on a year-over-year basis. That may be why certain articles questioning the success of Apple’s Retail operation (and calling for an overhaul) popped up here and there over the past couple of years. Blame it on management? Well, FQ1 and FQ4 continued to see solid YOY growth in this small window. But there’s no question Apple needed an actual SVP of Retail for best results, and hiring Angela Ahrendts from Burberry is certainly looking like an excellent move. But you won’t be able to quantify it directly from here on in.
While Retail is a “mature” operation in the context of Apple 2.0/3.0, it’s still expanding at a steady rate. Starting in May 2001 from the Tysons Corner, Virginia store opening, Apple had 358 stores (average basis) as of FQ1 2012, and had 437 stores as of FQ4 2014. As far as total Apple Store revenues, FY 2013 saw a 7% YOY increase (from about $18.8B to $20.2B) and for FY 2014 a 6% YOY increase (to about $21.5B). For FY 2012-2014, Retail accounted for about 12% of Apple’s total revenues.
It’s all a bit noisy and not fully comparable, but did you notice something in that last paragraph? The two Prime Imperatives for classic large-scale retail operations, as I understand them (remember – tweet at me or comment if I’m wrong!), are
(1) continue to expand the number of stores, and
(2) grow same-store sales.
Therein seemed to lie a problem – same-store sales just didn’t seem to be growing. Of course, with Apple it’s a very complicated stew. Apple adds (third-party) points of sale (whether it’s retail partners or carriers) constantly. So while it has scores of its own stores to supplement direct sales and so forth, it also has literally tens of thousands of other places where its products are sold (210,000 for iPhone as of FQ1 2015) – and hey, those airport kiosks count. And in total, Apple’s clearly doing well.
Still, Apple Stores can get crowded/unpleasant for various reasons, and the lack of a single (effective) leader until recently, among various other factors, didn’t help. Apple would obviously prefer, for business/employee morale reasons, to have any given Apple Store improve every metric (sales being obviously key) year over year.
In that vein, Ahrendts seems to have gotten an enthusiastic welcome at Apple, and will soon set her Retail-revamping plans in top gear. Also notice the “atypical” jump in Retail revenue – YOY growth of a solid 14.7% in FQ4 2014. It’s only one data point (all we’ll ever have, coincidentally!), and yes, it included a few days of Apple’ most successful iPhone launch ever (in some countries – not including mainland China). But it’s a start.
Revenue geography notes
In closing, some quick notes on revenue geographies. (Again, charts display much better at full size.)
Blue line is the rev geo’s operating margin, blue bar Apple Store revenues. Green line is Apple’s worldwide Retail operating margin, provided for reference.
Japan is an obvious Apple profit center with plenty of overall revenue contribution (almost $15B in FY 2014) and the highest (ex-Retail) operating margins by far. So why have Retail sales only crested $100M in a single quarter? And why did Japan Apple Stores have negative operating margin for two straight quarters in FY 13 – even the iPhone 5S launch quarter? As you know, most everything on this blog is educated wild guesswork. Attempting to apply some semblance of common sense nonetheless, Apple Japan’s apparent not-as-Retail-focused strategy would seem to make it tougher for Retail to scale – and therefore muster higher operating margins – over time.
Apple did make strides towards improving profitability in FY 14, though, despite the lack of significant revenue growth – so Apple Japan Retail is no longer the reliable “last place”. Maybe it’s just a more efficiently run “loss leader” than it used to be. And should Apple ever add stores beyond…well…eight (as per Wikipedia), the benefits of scale would presumably follow.
Rest of Asia Pacific (Read: Australia for the time being)
G’day, mate! Apparently, as far as Apple Stores go, this segment is all about Apple’s 21 or so Australian retail stores for now. Fun fact: India (which is part of South Asia) and the entire continent of Africa are both considered “Europe” to Apple. Since this retail operation isn’t as “far-flung” as I originally thought, makes sense that 2.5-3x the revenue base (lately) plus more stores equals generally better profitability than the Japan operation. Until recently, anyway. Moving forward, though? Wouldn’t we like to know.
Greater China was a distant third in Retail revenue, but a frequent second – sometimes first – in operating margin. You don’t need me to tell you that Apple’s looking very closely at the growth opportunities, especially in mainland China. Per Wikipedia, Apple has 15 stores now. The current goal is 40 in two years, as of October 2014. Another significant step towards Apple’s prediction/ambition to have China become Apple’s biggest revenue contributor.
Greater China also holds the distinction of being only one of two Retail segments to regularly ring up operating margins over the worldwide average during this 3-year period.
Europe’s Retail segment revenues, as of late, have been roughly 1.5x-2x that of Greater China – that differential is certain to vanish before long. As far as relative profitability? Maybe it’s the economy, maybe also the overhead, but Retail operating margins are an overall “fourth place” amongst the five revenue geographies in this three-year period. In FQ3 2014, operating margins dipped under 5% to take last place. But something interesting happened in FQ4 2014. With the exception of the consistent-patterned Americas revenue geography, Europe and all other geographies had a substantial uptick in operating margin, solidly over 10% (see that first, consolidated chart). iPhone effect? Maybe, but prior iPhone launches didn’t have nearly the same effect in FQ4 2012 and 2013. Also interesting is that FQ4 2014 Retail operating margins amongst all geographies had never been closer together in that 3-year period.
Saving the most boring for last. Most revenues (of course, the most stores, by far). Most consistent growth year-on-year. A solid #1 in operating margins, for now, trending above 20% on average. Above the worldwide operating margin average for 11 out of 12 quarters. Oddly, operating margins in this time frame “always” peak in FQ1 and “always” trough in FQ4. Back-to-school promotion-related, maybe.
Well, there’s your one moment in time. (I’ll be here all week.) If only Retail watchers could get actual Apple data on what’s ahead. Was FQ4 2014 reflective of some kind of profitability support/margin “harmonizing” effort? Are overall Apple Retail operating margins beginning to rebound, as FY 2013 and FY 2014 suggest? Will worldwide Apple Retail remain a steady 12% of Apple revenue longer-term, or is management pushing for 15%, maybe 20% over time?
Unfortunately, answers probably aren’t forthcoming. Just the way Apple planned it. Luckily, Apple did leave behind something for the professionals and dedicated amateurs to go on – even if it’s more of a “memento” as Apple makes a clean break from its reporting past.