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May 08, 2012 at 11:16 AM EDT
Apple: Retail Stores Require Special Metrics, Says Needham
Needham & Co.'s Charlie Wolf this morning offers some thoughts on Apple 's ( AAPL ) retail store growth at its chain of owned stores, with sales having risen 23%, year over year, last quarter, Apple's fiscal Q2, which was down from the 43% growth seen in Q1. However, Wolf introduces the notion that same-store sales by quarter are less relevant for Apple, given the cycles of product introduction, and he suggests instead modeling a "moving average" of sales growth, to smooth out that cyclical trend. Wolf also notes that same-store sales are affected by Apple's expanding the distribution of the iPhone, now its primary revenue generator, to many more outlets beyond its 300 owned stores: Same-store sales are the most frequently used metric in assessing the performance of retail chains and it’s the one we’ve reported since we began the Apple Store reports 11 years ago. The same-store sales metrics make great sense in measuring the performance of tradition retail chains […] However, we’ve gradually concluded that same-store- sales may be less relevant in measuring the performance of the Apple Stores. For one, the performance of the stores from one quarter to the next also reflects Apple’s new product introduction cycles. When the company introduces new products or upgrades existing ones, such as the iPhone or iPad, same-store-sales typically surge as shoppers make a beeline to the Apple Stores, which they favor over non-Apple outlets because of the superior shopping experience. As importantly, the sales performance of the Apple Stores is in a sense a hostage to the company’s overall distribution strategies. To illustrate, Mac sales in the stores were adversely impacted in 2009, when Apple broadened Mac distribution in the U.S., adding other chains, such as Best Buy, as resellers. iPod sales in the Apple Stores tanked when iPod demand caught up with supply and Apple responded by vastly increasing the number of outlets selling the product. Same-store sales have also been affected by the rollout of the iPhone to carrier stores around the globe. Beginning with this report, we’ve switched from charting year-over-year same-store quarterly sales, which can fluctuate widely from one quarter to the next, to charting a four-quarter moving average of sales along with annual Mac and non-Mac sales. Annual sales do not completely solve the distortion in same-store sales metrics outlined above. But we do believe that they provide greater insight into the stores’ performance over time than do quarterly data. The four-quarter average comparison is a little more favorable, Wolfe shows. On that basis, Apple retail sales rose 37.9%, year over year, in the March quarter, down from 59% in Q1:

Needham & Co.’s Charlie Wolf this morning offers some thoughts on Apple‘s (AAPL) retail store growth at its chain of owned stores, with sales having risen 23%, year over year, last quarter, Apple’s fiscal Q2, which was down from the 43% growth seen in Q1.

However, Wolf introduces the notion that same-store sales by quarter are less relevant for Apple, given the cycles of product introduction, and he suggests instead modeling a “moving average” of sales growth, to smooth out that cyclical trend. Wolf also notes that same-store sales are affected by Apple’s expanding the distribution of the iPhone, now its primary revenue generator, to many more outlets beyond its 300 owned stores:

Same-store sales are the most frequently used metric in assessing the performance of retail chains and it’s the one we’ve reported since we began the Apple Store reports 11 years ago. The same-store sales metrics make great sense in measuring the performance of tradition retail chains […] However, we’ve gradually concluded that same-store- sales may be less relevant in measuring the performance of the Apple Stores. For one, the performance of the stores from one quarter to the next also reflects Apple’s new product introduction cycles. When the company introduces new products or upgrades existing ones, such as the iPhone or iPad, same-store-sales typically surge as shoppers make a beeline to the Apple Stores, which they favor over non-Apple outlets because of the superior shopping experience. As importantly, the sales performance of the Apple Stores is in a sense a hostage to the company’s overall distribution strategies. To illustrate, Mac sales in the stores were adversely impacted in 2009, when Apple broadened Mac distribution in the U.S., adding other chains, such as Best Buy, as resellers. iPod sales in the Apple Stores tanked when iPod demand caught up with supply and Apple responded by vastly increasing the number of outlets selling the product. Same-store sales have also been affected by the rollout of the iPhone to carrier stores around the globe. Beginning with this report, we’ve switched from charting year-over-year same-store quarterly sales, which can fluctuate widely from one quarter to the next, to charting a four-quarter moving average of sales along with annual Mac and non-Mac sales. Annual sales do not completely solve the distortion in same-store sales metrics outlined above. But we do believe that they provide greater insight into the stores’ performance over time than do quarterly data.

The four-quarter average comparison is a little more favorable, Wolfe shows. On that basis, Apple retail sales rose 37.9%, year over year, in the March quarter, down from 59% in Q1:

The Apple Stores collectively posted a 37.9% sales gains in March, down from 59.0% in December, which captured the launch of iPhone 4S. The Apple stores accounted for 11.2% of Apple’s worldwide revenues in March, down from 12.9% a year ago. After reaching a high of 21.6% in the second quarter of 2008, the Apple Stores’ share of Apple’s revenues has been declining. The leading cause of the downtrend has been the acceleration in the sales of iPhones, which are now sold through the stores of 230 carriers. In this regard, it’s instructive to note that the Apple Stores’ share of worldwide Mac sales has held relatively steady at around 21% despite an increasing number of stores selling Macs both here and abroad.

Most important, perhaps, Wolf concludes that annual sales data really smooth out the retail performance, and show steady growth over years:

Annual same-store sales tend to smooth out quarterly fluctuations. Apple Store same-store sales have increased at a steady pace with the exception of 2009, when the country experienced a recession. Between 2002 and 2011, same-store sales increased at a 17.8% compounded annual rate.

Wolf maintains a Buy rating on Apple shares and a $620 price target.

Apple shares today are down $10.23, or 1.7%, at $559.25

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