The Exchange

Apple’s Stores Are Lame, Tired, and Emotionless

By Brian Sozzi

“Everything happens for a reason.” Remember carving that into a giant rock back in high school when a beau kicked you to the curb? (Full disclosure, I can certainly recall breaking a couple Swiss Army knives mid-carving session!) This classic saying used amongst scorned tweens, oddly, is easily applied to investing. If a company produces a bad stretch of quarters that leads to a dismal year, chances are that day in and day out the decisions of highly paid executives are putting the business in a position to lose. Sometimes the truth hurts, and that is no joke.

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Apple’s (AAPL) now distant third quarter earnings release from July left a bad taste in my mouth, but not due to the obvious (that would be older pieces of overhyped plastic eating away at profit margins). The company’s sales from its global product meccas, the retail stores, were “approximately” flat compared to the prior year quarter. In executive jargon, that means sales were fractionally down. That definitely is the opposite outcome of the norm regarding Apple’s retail stores, which have usually been robust producers of best in class average sales per square foot metrics amid rabid demand for the latest pieces of shiny mobile internet friendly plastic in various screen sizes.

Bluntly, what in the world is going on here? Let me voice this upfront: the problems at Apple’s retail stores extend beyond the lack of an executive overseeing the division’s strategy. (Might want to give a ring to JC Penney paycheck thief Ron Johnson to reprise his role as Apple’s retail leader, at least he knows how to do that.) Rather, it has to with actions, or lack thereof, coming from the top that has allowed rivals to invade on previously well-guarded market share turf.

The Most Relevant Data on Apple’s Retail Stores

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3 takeaways from this fancy table

  1. Executive arrogance in staying firm on a very methodical, outright slow, new product launch schedule is causing Apple to fall short of besting its record prior year revenue results. During Apple’s dominance (in the consumer and stock market) every quarter seemed to be a record. As Apple internally obsesses over its non-revolutionary product upgrades, Samsung and Google (GOOG) are releasing new mobile devices that gobble up market share as they offer features not found on Apple products. In turn, that weighs on Apple’s product prices, as is apparent in the slowing revenue trend (two quarter trend).
  2. Given the competition being in the market with products conveying a wow factor, Apple’s retail stores are increasingly being viewed by consumers as a destination selling overpriced commodity products. Think I am wildly off base? Check out the weakening run rate in visitors per store, per week.
  3. Where is the re-imagination of Apple’s retail store layout? Retailers must constantly tweak their store layouts to stay relevant. Looking at Apple’s still strong operating income, they are content with milking the cow, a recipe for a long-term loss of competitiveness. I would rather see Apple readying to launch a new store prototype that could be implemented at all stores currently in operation. It’s not like the company is hurting for cash.

To shed light on the lameness of Apple’s retail stores, I visited a Sony (SNE) store (video above) that is situated right next to an Apple store. What a great way to do a side by side comparison, even though mall security made it difficult (they are so nosy). Sony has 21 full-size retail stores nationwide compared to Apple’s 252, as well as pop-up shops that put Microsoft’s (MSFT) temporary Surface locations to shame. Unlike Apple, Sony doesn’t disclose the financials of its retail stores and, in fact, it’s not visibly obvious from the company’s website who runs the division. Secrecy aside, Sony is on to something…

  • Stores present the consumer with a picture on how an entire home entertainment and mobile experience would look and operate in the living room. Pretty important ahead of Sony’s PlayStation 4 launch. Not spotted: Apple TVs hanging on the walls of the Apple store.
  • Stronger visual cues to draw the consumer in from the mall, such as bright colors, TVs playing Sony movies against neutral backgrounds, and different shaped product presentation tables. Believe me, this stuff matters; humans eat and buy with their eyes.

Bottom Line

Apple’s retail stores are long overdue for an appearance refresh. Further, the decision-making execs (ahem, Tim Cook) have to stop starving the store base of the inventory that is required to keep consumers out of the open arms of competitors.

So, while Apple continues to build these giant shrines to its products across the world utilizing a generally dated interior design, rivals are closing the gap first in malls and soon outside the mall. Big problem.

Brian Sozzi is CEO & Chief Equities Strategist of Belus Capital Advisors.

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