Are Apple Stores’ Blues That Blue?

Its 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 companys likely record-breaking
earnings for the holiday quarter will go on to fuel big expansion in 2012.
Apples 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 companys retail operation isnt 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 isnt so exciting. While Apples 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, Apples stores are dragging down the
companys 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 stores quarterly sales have stagnated,
they remain incredibly strong compared to other bricks-and-mortar retailers.
According to research firm RetailSails, Apples 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 cant compete. GameStop (NYSE: GME )
stores brought in just $1,009 per square foot. The problem isnt that Apples
retail operations arent profitable. The problem is that online retail operations
like Apples 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