Apple Inc (AAPL)

[langostino]

errrr roni

There are these things called 10-Qs and conference calls. Why wonder when you could just look it up and know for sure? Or were you figuring your cadre of cyberspace research assistants would do the work for you?

Hint: the stores are losing money net, net, and they are adding fixed (non-variable) costs to the SG&A line on the income statement. According to a story out earlier this week, ominously, same store sales at stores open more than 1 year have fallen. When it unveiled the retail store initiative it said the stores would be profitable by Q1 2002 (3rd quarter after stores were launched) and detailed numbers would be released in the Q1 '02 conference call. On that call Apple changed its mind and refused to provide numbers, saying only that the stores wouldn't reach profitability until later in 2002. They didn't. So Apple said they would reach profitability by the end of 2002. They didn't. So Apple said they would reach profitability in early 2003. They didn't. So last week Apple said they would reach profitability "at some point this year" (Ron Johnson, retail chief in Boston Globe article). My recommendation ... don't hold your breath.

Opinion: I suspect the "vanity" flagship stores in SoHo, etc. are loss leaders. Some of our posters more intimately familiar with SoHo rents for storefront retail can offer up educated guesses on the rent alone (never mind the improvements like "Steve's Staircase" of which there have been more than $200 million since Apple began setting up the stores in summer 2001). I can probably supply a rough estimate of total labor costs. In order for that store and the others like it to be profitable, it would have to be moving a pretty darned huge amount of product.

Closing thought: The financial model for the stores was predicated on the notion they would be additive to the existing bricks and mortar retail sales channel. The financials show two things: that bricks and mortar sales have fallen substantially since the Apple Stores have been in existence, and that the stores have merely shifted sales from other bricks and mortar retail channels. If the stores can't find a way to break this pattern and reach the original assumptions/requirements that they be additive to retail sales, the retail store initiative will simply wind up reducing operating margins over the long haul.