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Why Apple Is the Best Retail Stock According to This 15-Point Checklist

I am constantly overwhelmed by the number of customers I see at my local Apple store

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Jae Jun
Dec 01, 2015
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Apple’s (

AAPL, Financial) entrance into the brick and mortar retail space began on May 15, 2001 when the company announced that it would open 25 stores in 2001.

Then just four days after that announcement, it simultaneously opened its first two stores, on the same day, in Tysons Corner in McLean, Va., and the Glendale Galleria in Glendale, Calif.

About five months prior, Apple was already planning a major move into the ecommerce space when it launched its iTunes Software on Jan. 9, 2001 and laid the foundation for its iTunes Music Store, which it launched on April 28, 2003.

By the time Apple launched its App store in 2008, its iTunes Music Store had surpassed Walmart (

WMT, Financial) to become the number one music retailer in the U.S.

Apple celebrated by releasing the following statement:

With over 50 million customers, iTunes has sold over 4 billion songs and features the world’s largest music catalog of over 6 million songs.

And with it most recent launch of iTunes into China on Sept. 30, Apple has announced that it now has more than 800 million iTunes customers. It’s only a matter of time until the company reaches its 1 billionth user for iTunes.

I consider Apple’s retail operations to consist of the following:

  • Ecommerce website.
  • Its brick and mortar stores.
  • The iTunes Store.
  • The App Store.
  • The Mac App Store.
  • The iBooks Store.
  • AppleCare.
  • Licensing and other services.

In his last TV appearance in 2011, Steve Jobs said that “Apple is growing like weeds.”

He clearly saw the future as here are the most recent retail sales results from Apple’s latest 10-K Annual Report filing with the SEC.

  1. The iTunes Store generated a total of $10.2 billion in net sales during 2014 compared to $9.3 billion during 2013.
  2. The growth in retail segment net sales in 2014 was primarily driven by increases in net sales and unit sales of iPhone and Mac, partially offset by declines in net sales and unit sales of iPad and iPod. With an average of 424 and 403 open stores during 2014 and 2013, average revenue per store increased to $50.6 million in 2014 with net sales of $21.46 billion.
  3. Including revenue from the iTunes Store, the App Store, the Mac App Store, the iBooks Store, AppleCare, licensing and other services = $18.063 billion.

Apple’s retail operations clearly exploded since Jobs introduced the store concept in 2001, where he also first introduced the “Genius Bar” store concept.

Why analyzing retailers with Phil Fisher’s 15-point checklist works

Analyzing retailers is a complicated operation.

The best way to analyze any retailer is to run Philip A. Fisher’s 15-point checklist, which Fisher introduced in his book "Common Stocks and Uncommon Profits."

Just as Benjamin Graham is widely considered to be the Father of Quantitative Analysis, Phil Fisher, in his own right, is considered to be the father of Qualitative Analysis and growth investing.

Qualitative Analysis, for those who do not know, is the art of analyzing a company based on the quality of its operations, quality of management and finally by the level of superior performance over time as measured by consistency of operations.

The most important points in Fisher’s work, besides consistency, were;

  • Getting “the story” right.
  • Not overpaying for what people envision as a very promising future.

Many investors make the mistake of buying shares of a company that makes a product or provides a service they believe is a game changer. That is, they get emotional about it. This leads to an automatic assumption that, if they just buy shares of the company (no matter what the price), they will get rich.

It’s happened in some rare cases. Unfortunately, it doesn’t work like that.

Many have high hopes for companies, like Tesla (

TSLA, Financial), but the current numbers do not back up “the story.”

The Fisher 15-point analysis is a way to take emotion out of an analysis.

It’s possible because Fisher’s methodology objectively analyzes a company’s operations looking for consistency over time in the real world. It’s not focused on one year or one quarter results.

This method also forces you to examine the financial statements of the firm and make sure you don’t overpay for the company’s growth prospects.

Apple’s 15-point analysis

1) Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?

Apple creates its products and services to run on what is now known as the Apple “ecosystem.”

Besides being works of art in design and very appealing to the eye and touch, each of its products, along with its services are also very user friendly and once purchased tend to become an essential part of life for most Apple customers.

The reason for this is that the ecosystem links all of Apple’s products and services into one place.

You can purchase and store your music and then transfer it among all your devices. On top of that Apple is constantly innovating each product and thus continually causes its customer base to want the next upgrade.

It’s constant demand.

This demand is universal and worldwide as customers in China have a similar addiction to their iPhones as someone in Canada or Singapore would.

As Apple further expands its operations globally, its potential customer base is unlimited because of the power of Apple’s ecosystem.

2) Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?

With Apple having about $200 billion in cash and cash equivalents on its balance sheet, expanding its store operations costs Apple pennies on the dollar in relation to total sales and is a no-brainer.

Fortunately for us, management is determined to do so as Apple now has anywhere from 424 to 437 stores open and surely has the determination to continue opening more stores in Asia, for example.

While expanding store operations, management is also just as determined to stock those retail stores with innovative products and drive even more customers to its stores.


Number of Apple retail stores and growth

3) How effective are the company’s research and development efforts in relation to its size?

Obviously with the massive amount of free cash flow that the company generates and its massive war chest of cash and cash equivalents, Apple’s research and development budget is rather conservative.

That’s because its retail operations concept is running as smoothly as it can, and the company does not need to change the concept, especially when you see results like these:


Best in class: Sales per square foot

Here is what the company said about its research and development strategy.

The company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace and are directly related to timely development of new and enhanced products that are central to the company’s core business strategy

If it ain’t broke, don’t fix it.

4) Does the company have an above-average sales organization?

The key identifier of an above average sales organization is not only how a company’s operations perform in good times, but in how it performs in bad or difficult times.

Obviously China has experienced a slowdown over the last year. However the chart below helps you conclude that Apple is an elite sales organization.

5) Does the company have a worthwhile profit margin?

Because Apple does not do much in the way of wholesale discounts to stores like Best Buy (

BBY, Financial) or Walmart, it is able to maintain some of the best profit margins for its retail operations.

Stores like Best Buy and Walmart thus are forced to offer Apple’s products as “Walk-In” items to draw traffic to each store.

The price you pay at your local Apple Store is consistent with prices from other retailers.

This is unique in the retail industry.

6) What is the company doing to maintain or improve profit margins?

One of the key roles that Tim Cook had prior to becoming CEO was to be in charge of overseeing Apple’s product production.

Having the CEO also be an expert in production obviously helps. Besides that, Apple also operates through “economies of scale” where it is able to reduce its cost per unit easily due to its market position and being one of the biggest players in the market.

If you want to see just how profitable Apple is compared to its competitors, then just look at the following chart.


Apple running away with all profits

7) Does the company have outstanding labor and personnel relations?

Employee relations at retailers are always a difficult area to gauge, but for full-time employees at Apple retail operations, benefits include:

  • Medical and dental coverage.
  • Special therapy coverage for those suffering from hard times.
  • Stock-buying program in which retail employees can get a 15% discount on any Apple shares they buy.
  • First on line for new product launches.
  • Wear whatever they want to work as long as the Apple T-shirt and nametag are worn while working.

8) Does the company have outstanding executive relations?

When it comes to executive relations between CEO Tim Cook and Senior Vice President of Retail and Online Operations Angela Ahrendts, things could not be better as in 2014 she earned total compensation of $83 million and was the highest paid female executive in the U.S.

Ahrendts told Fortune’s Adam Lashinsky, recalling her first meeting with Cook, “I did not expect to be moved by the man, and I left and I thought, ‘Ohhhhh! My life was perfect, Aaargh, why, why, why?”

“[Nothing will] take him off of always doing the right thing. Not just for Apple, but for Apple’s people, for communities, for countries. The world needs more leaders like Tim.”

9) Does the company have depth to its management?

Apple has incredible depth to management with Cook and his team of executives.

But since this is about Apple’s retail and online operations we need to concentrate on Angela Ahrendts. Tim Cook persuaded her to join Apple from Burberry Group PLC (

BRBY, Financial), where she was a highly successful CEO from 2006 to 2014.

10) How good are the company’s cost analysis and accounting controls?

This is where Fisher put on his quantitative analyst hat and ran through a company’s financial statements to look for consistency over the years.

He did this by analyzing a company’s income and cash flow statements as well as its balance sheets.

Since I analyze a lot of companies each year and in order to save myself a lot of time, I spent a couple of decades designing a computer algorithm to assist me in my quantitative analysis.

I officially completed and launched this algorithm on May 1, which I named Friedrich.

Friedrich basically does 2,500 calculations on 10 years of financial statements using data from the Old School Value analyzer, for each company under analysis and then organizes the results into the 30-plus original ratios that I created over the years.

As a result, in less than one minute, I am able to create the following Friedrich Data File for Apple (or any nonfinancial stock):


30-plus Original Ratios | Click to Enlarge

My work is based on free cash flow and what you see above is basically 30-plus different ways of analyzing a company and doing so in a highly efficient and verifiable manner that is also lightning fast.

Friedrich basically does all my quantitative analysis for me and thus gives me the time to research the qualitative aspects, similar to what I am presenting here in this article.

To better understand the table above as well as view the ideal parameters to look for in each of my ratios, please go to the Legend Page (print it out). Here’s a detailed guide on how Friedrich works and how you can use it in your own analysis of stocks.

In this analysis what we are looking for is consistency in the results year on year (for a decade) because as an investor, I do not like surprises.

Thus if a company performs well over a 10-year period under analysis, then obviously its cost controls and accounting controls are excellent.

In the Friedrich table above, all the results are GAAP results or “as reported.” They are not pro forma or adjusted for one-time charges and other adjustments that are designed to make a company’s results look better than they are.

Because Apple’s results are superior in quality, the company excels even without any adjustments.

For example using my FROIC Ratio = Free Cash Flow Return on Total Invested Capital, we have Apple’s results coming in above 20% for the last eight years, which is excellent.

What FROIC basically tells us is how much free cash flow the company generates for every $1 of invested capital (long-term debt + shareholders equity) it employs. So Apple in the most recent “trailing 12 months” data returned 31 cents in free cash flow for every $1 the company invested on Main Street.

Friedrich is mostly based on the power of free cash flow in the investment process, which I verified by writing a proof after analyzing the Dow Jones Industrial Average from 19502009, which you can view by going here.

Since all companies are treated on an equal footing by Friedrich, here are two of the best pure retail operations that Friedrich has found for us. You can compare Apple in juxtaposition and see with your own eyes how powerful Apple really is.



All three companies have unique retail operations and are all extremely profitable, based on the company’s FROIC results.

Each company also operates mainly through organic growth instead of buying out the competition and trying to grow operations that way. In an era of Federal Reserve-inspired zero interest rates, it is refreshing to see three companies that grow organically without having to submit to the easy fix of borrowing hand over fist, just because such an option is available.

11) Are there other aspects of the business, somewhat peculiar to the industry involved, that will give the investor important clues as to how outstanding the company will be in relation to its competition?

Apple is run on a culture that was built by the genius Steve Jobs.

To give you just one example of Jobs’ genius, he saw early on that music was something that everyone on the planet loves. At the time there was no way for people to enjoy all their music any time they wanted, no matter where they were (home, beach, at the gym, etc.), and he also noticed that even the world’s largest record stores could not hold 20% of all the music that had been previously recorded.

So he had his team develop iTunes and from there created the iPod to store 1,000 or more songs, where people could then listen to those songs anywhere they wanted.

From there his team developed the iTunes Music Store, where you could buy songs for 99 cents each or whole albums.

It also did wonders for the music industry as it allowed record labels to sell 80% of the inventory that they had on file, because traditional record stores didn’t have space to sell it all.

By creating an ecosystem, Jobs freed his customers and opened up a massive database of music for sale, while at the same time destroyed services like Napster that threatened to destroy the music industry. That is just one example of why innovation is built into the culture at Apple and thus makes it a unique company.

12) Does the company have a short-range or long-range outlook in regard to profits?

Jobs used to operate with a three-year outlook for new product concepts going forward and at most would go out five years.

He did so because, in the technology field, innovation moves so quickly that to stay ahead of the curve the outlook had to remain three to five years. As an organization Apple has barely scratched the surface as to its potential, even though it has grown to be one of the largest companies on earth. It has barely scratched the surface as citizens of India and China are only now just coming on board as customers by entering the Apple ecosystem.

With almost 3 billion people in just those two countries alone, the future for Apple indeed looks bright.

Apple will most certainly be successful as the secret to its success is that it refuses to bring a product to market unless it can make a certain profit margin on each unit sold. Jobs learned this strategy from observing the mistakes made by Nokia (

NOK, Financial), who was a pioneer in cell phone and smartphone technology and was the king of that industry some seven years before Apple first launched its iPhone.

Nokia totally dominated and had the largest market share in its industry. Where Nokia failed (and where Apple succeeded) is that Nokia went for market share instead of profit margins and destroyed its wireless division as a result, finally selling that division to Microsoft for pennies on the dollar of what that division used to be worth in the year 2000.

So Apple will always be profitable, as long as management continues to concentrate on profit per unit sold and not market share. That is the secret to success for all businesses in my opinion but a model that is rarely practiced.

13) In the foreseeable future, will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?

Apple’s biggest problem is what to do with all the cash it is generating. Of the 15 points under analysis, this one causes zero concern.

14) Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles or disappointments occur?

Apple, unlike most firms, does not freely discuss what it is doing with investors except when it launches product presentations and through various select press releases.

Jobs was secretive and was not a trusting soul after getting forced out of Apple in the old days. But Apple does not need to be public as it is the most widely talked about and covered company in history by the press and bloggers.

You can find almost 100 articles written about the company on any given day. When there are problems with its products, Apple management acknowledges them and then goes about quietly correcting those problems immediately, which is all you can ever expect from any company.

15) Does the company have a management of unquestionable integrity?

Senior Vice President of Retail and Online Operations Angela Ahrendts, told Fortune (in the article I linked under Fisher point #8 above) the following about CEO Tim Cook.

[nothing will] take him off of always doing the right thing. Not just for Apple, but for Apple’s people, for communities, for countries. The world needs more leaders like Tim.

It has been my long experience, that when the CEO operates through honesty and integrity, that the rest of management usually follows suit, simply because in most cases the CEO hired them as Cook did with Ahrendts.


There you have it.

A complete Fisher “15 point” qualitative analysis of Apple, along with a completeFriedrich quantitative analysis.

Apple is one of my clients' largest holdings and will be so for a long time to come as it is nowhere close to my sell price.

Apple is only in the early innings (second or third) of a nine-inning game in reference to its future growth prospects. The potential customer bases in India and China are daunting. Few product manufacturers can achieve success in opening retail operations, but no product manufacturer has ever achieved the success that Apple has.

Success in retail is not only measured by how many people visit a company’s store but also by how much money each spends when they get there.

Apple management understands that it is very important for the company to make a profit on each sale and not operate like Amazon (

AMZN, Financial), which barely generates a profit at all because it sells everything at cost just to increase sales. We saw from the Nokia example above how such a strategy usually ends.

Each time I go to the mall, I am constantly overwhelmed by the number of customers I see at my local Apple Store. With Apple generating $4,551 in sales per square foot of retail space, it clearly shows that its customer base loves the experience of shopping at an Apple store but also spends money when there.

That is why Apple is my top retail pick and one of the largest holdings in my client portfolios.

Disclosure: The author is long Apple.

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