Are Apple Stores' Slow-Growth Blues Really That Blue?

Are Apple Stores' Slow-Growth Blues Really That Blue?
Are Apple Stores' Slow-Growth Blues Really That Blue?


Anthony John Agnello, Consumer and Technology Writer, InvestorPlace

It's finally over. Apple's (NASDAQ:AAPL) record-breaking 2011 has come to a close, and it looks like the holiday quarter rush is going to bear sweet fruit. Morgan Keenan analyst Travis McCourt expects iPad sales for the period to be around 13 million, trouncing the 11.2 million Apple sold during the same time in 2010. Morgan Stanley estimates the company sold between 31 million and 36 million iPhones. Christmas was good.

The company's likely record-breaking earnings for the holiday quarter will go on to fuel big expansion in 2012. Apple's product line will further diversify when it introduces its own HDTVs later in the year, and the new iPad 3 and iPhone 5 models will aim to continue their predecessors' success.

The company's retail operation isn't slowing down, either. Apple so far plans to open 40 new stores across the world in 2012, exciting news considering the average store sells about $10.7 million of merchandise per quarter.

But maybe that isn't so exciting. While Apple's products and digital media stores like iTunes continue to dominate, its once-ascendant retail operation is losing some luster. Revenue from retail was flat during the fourth quarter of 2011 despite having 40 more stores than the same period a year ago. That $10.7 million average quarterly sell-through was down from an $11.8 million average the previous year. In fact, Apple's stores are dragging down the company's overall retail revenue growth, according to a study at Seeking Alpha.

This means when it comes to bricks-and-mortar retail, Apple investors might be more comfortable with Apple selling its products exclusively through Best Buy (NYSE:BBY), Target (NYSE:TGT), Wal-Mart (NYSE:WMT) and other official retail partners rather than spending hundreds of millions to open stylish, cubist stores in a city near you.

Is that it, then? Should Apple refocus in 2012 on further expanding its profitable digital storefronts like the App Store and iTunes as well as its own online retail operations? Absolutely not. At this point in time, even as the average Apple store's quarterly sales have stagnated, they remain incredibly strong compared to other bricks-and-mortar retailers.

According to research firm RetailSails, Apple's annual retail sales per square foot as of August 2011 were $5,626, making it the No. 1 chain by sales per square feet in the U.S. That placed the company above luxury retail outlets with few locations (and thus fewer square feet) like Tiffany & Co. (NYSE:TIF), which averaged $2,974 per square foot annually in RetailSails' study. On equal footing, Apple absolutely trounced direct competitors in the electronics market. Best Buy pulled in just $831 in annual sales per square foot across nearly 1,150 stores. Even small electronics operations can't compete. GameStop (NYSE:GME) stores brought in just $1,009 per square foot.

The problem isn't that Apple's retail operations aren't profitable. The problem is that online retail operations like Apple's own website and competitors like Amazon (NASDAQ:AMZN) continue to eat away at bricks-and-mortar store sales across the board.

The key for Apple, then, is to find an effective way to continue expanding its physical retail operations into new markets like China (as of the end of Q3, Apple had made $2.6 billion in revenue from its stores in China, four times what it earned in 2010) while supplementing revenue lost from low foot traffic in the U.S. with sales through its online operations.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.