Apple Not Averse To Closing Some Apple Stores, Exec Admits

by , 3:30 PM EDT, May 2nd, 2003

The head of Apple's retail stores has admitted to a Wall Street analyst that the company would consider closing some of its locations if they don't become profitable in the foreseeable future. The admission is the first indication from Apple that two years since launching its first two stores, the company is already questioning the profitability of some of its 53 locations.

The comments were made to Merrill Lynch analyst Michael Hillmeyer, who met with a number of top Apple executives as part of an analyst tour on Thursday at the company's headquarters in Cupertino, Calif. In a one-on-one meeting with Hillmeyer, Ron Johnson, Apple's Senior Vice President of Retail, explained that the company "would not be averse to closing some stores if those stores were not going to be able to cover their variable costs," Hillmeyer wrote in a company update report obtained by The Mac Observer.

Johnson was not quoted directly in the report.

In addition, Johnson said the company is unlikely to open new stores overseas until its US stores are profitable. "Apple hopes to have a profitable quarter for its retail stores by the end of (calendar) 2003," Hillmeyer wrote.

Johnson's comments are the first such public statement acknowledging that Apple is contemplating the closing of some of its 53 existing locations. While Apple has painted a positive picture on the success of the stores in terms of profit margins and increased store traffic, it has yet to pay off in profits or in helping to increase Apple's market share.

First-quarter PC market share numbers released by research firm IDC last week show Apple's market position is slipping further away from its elusive goal of 10% the company set for itself exactly two years ago when it open its first two stores in California and Virginia. In the first quarter, Apple worldwide market share slipped to 2.1% from 2.4% in the same period a year ago. In the US, Apple share came in at 2.9%, compared to 2.4% in the same period of 2002.

At the time, Apple CEO Steve Jobs remarked that one major goal of the stores was to increase market share from what was then 5% to at least 10%. More than 30 of Apple's retail stores opened within the first 16 months since May, 2001.

Other highlights of the Hillmeyer report include:

• Apple is accepting lower short-term profits now in an attempt to grow market share and position its products for when the economy rebounds, according to CFO Fred Anderson.
• Apple's direct sales, which include the retail stores, now account for around one-third of total revenue.
• Apple will open 17 additional retail stores between now and the end of the year.
• Breaking down the company's mix of sales, Tim Cook, head of Apple's sales and operations, told Hillmeyer the unit sales mix is roughly 40% consumer, 30% education, 21% small business, and 9% medium and large corporations.
• Educational sales are "extremely weak," Hillmeyer wrote, and have been for the past two quarters. Apple US education market share was about 13.5% as of late 2002, down from around 15% in late 2001 and in the 20% range five years ago.
• Apple believes its educational market share in Western Europe is improving where it currently stands at around 9.5%.
• The professional market also remains very weak, Apple told Hillmeyer, but the video market and renewed interest from the government segment are the bright spots. Government sales are up 66% in the past year.
• "Apple believes memory prices could tighten through the summer while flash memory is in surplus and likely will remain so. LCD supply remains tight and could tighten further, driven by such factors as notebook demand and CRT replacement," Hillmeyer wrote.
• Apple believes its 'Switcher' campaign is gaining momentum, primarily among younger people and women. The reason is centered around Apple's newer retail stores being in shopping malls where 80% of the traffic tends to be either women or people younger than 35 years of age.
• "Apple considers switchers to be systems purchasers who have either only used PCs in the past (30-35% of store CPU sales) or who have never used a PC (15-20% of sales)," Hillmeyer wrote.
• Apple's goals is keeping retail store inventory at no more than 14 days. At present, the number stands at 17 days.
• Hillmeyer believes that roughly 50-75% of the 99 cent price to download music from the company's new online music service will go right back to the record labels.

Even after meeting with Apple executives, Hillmeyer did not change his mind about the future value of the company's stock. "We maintain our Sell rating on Apple shares and believe that the stock remains expensive on both P/E (price-to-earnings) and P/S (price-to-share) metrics," he wrote. "We think that further reports of weakness in Apple's primary markets over the next few months could negatively impact the stock."