Retail Sales

The global financial crisis that peaked in 2008 resulted in far-reaching effects all across
business circles. The crisis came to be because banks were in a position to create money much
too quickly. The fact in itself would not have been a problem had the banks not used the money
to push up house prices and speculate on financial markets. Whenever a bank makes a loan or
lends out money, they are creating money. In a seven-year period leading up to the financial
crisis, financial institutions had managed to double the amount of debt in the economy
(Campello, Graham and Harvey 476). The overall impact of the crisis was a depression that
many referred to as the Second Great Depression. As a result of this recession, many companies
had bad business runs that led to steep losses, and even more had to close shop entirely.
Despite the poor performance by some corporations, other firms performed remarkably
better. Apple Inc., the global computer company, known for its flagship brands, the iPhone, the
Mac, and the iPod, is one such company. Many factors can be attributed to the positive growth
that the company experienced during the crisis and allowed it to become the biggest corporation
in the world by market capitalization. Even as the recession was deepening and sales of rivals

Surname 2

were slumping, Apple Inc. managed a new single-quarter revenue record in the last three months
of 2008. The feat was made possible as a result of massive sales in Macs (2.5 million) and
iPhones (4.3 million). Strong sales in two of their main products were enough to ensure the
technology giant had a fourth-quarter leap in earnings of more than 47% from the same quarter
in the previous year (see Appendix 1).
During the fourth quarter (Q4) of the 2008 fiscal year, Apple reported net income of $1.7
billion which marked $1.82 per share compared to the net income of $1.1 billion which
translated to $1.26 per share during the same quarter in the previous financial year. Sales also
increased to $9.9 billion compared with $7.9 billion in Q4 the last year. From the results, Apple’s
gross margin rose to 36.6% from 34.7% during a similar time in the past year. A constant stream
of innovative new products kept customers coming to the Apple stores (Razeghi 4). The main
products responsible for driving sales are the iPod, the Mac, and the iPhone (See Appendix 1).
Despite having more than 70% of the MP3 player market, the iPod sales were further bolstered
by investing in outside markets. The iPhones met and comfortably exceeded their CEO’s
prediction of 10million units in sales by the end of 2008 (Razeghi 8). And the refreshed
Macbook resulted in a sales rise of 34% (Micheals 16). In the same year, Apple also shied away
from joining the fray into netbooks which the company thought their consumers would not want.
The move solidified the brand image for Apple as a mover of premier products, boost consumer
confidence, and set them up for the grand fiscal year that was to follow (2009).
Another major factor that contributed to the company’s impressive performance was the
establishment of customer response and feedback streams into their client relations. In 2007, at a

Surname 3

time when most other computer manufacturers seemed unaware of the need to have a ready
system in place to respond to customer feedback, Apple set up the Genius Bars. The Genius Bars
were a technology support station located within some Apple retail stores, specifically for the
purpose of offering help and support for Apple products. The hiring of a well-rounded team of
staff whose sole purpose was to help customers loyal to the brand derive even more benefits
from their purchases added to the appeal of the products. As a result of the interventions,
ordinary computer users were encouraged to purchase Apple products since they could count on
the availability of cheap support and maintenance whenever they ran into any issues or errors.
The improved customer experience from the select centers resulted in a boost to the brand image,
with many of their competitors adopting the same technique.
Apple’s performance resulted in a big return on investment for the stockholders over the
three-year period. To get the simple gross returns on the investment, we get the share prices
between the close of 2009 and the beginning of 2007. Since the time frame between the start and
end time of our consideration period is a time series, the simple gross returns and log returns can
be calculated as follows.
For simple gross returns, the τ -period simple gross return at time t equals the product of τ one-
period simple gross returns at times t − τ + 1 to t. To represent this, we have
(1)

Using equation one on the values of the opening and closing stocks from Table 1, the simple
annual returns for the company are as follows.

Surname 4

Year 2006 2007 2008 2009 2010
Returns 86.29 154.63 174.96 85.88 202.44
Table 1: Returns from Apple Stock over
202.44 – 86.29 = 116.15
The continuously compounded (log) returns over the same period show a result of 2.06509. The
relatively good performance year after year ensured that the company had willing investors who
were always willing to put their money into business operations.

0
50
100
150
200
250

0
50
100
150
200
250

AAPL stock Performance 2007-2009

OpenHighLowClose

Figure 1 : Apple Stock Performance 2007-2009

Surname 5

Aside from the introduction of new products to rival their competitors, and good
performance in the years preceding the financial crisis, Apple also enjoyed some advantages that
placed it above its rivals. A look at their liabilities and equity growth rates reveals that the
company was better placed than its rivals were at the beginning of the financial crisis. The fact
that Apple Inc. had no long-term debt at the start of the crisis. As such, they had no prior
commitments that they had to settle that would affect their bottom line. Compared to their rivals,
the absence of long-term debt ensured that they had better profit margins compared to their
competitors. Apple Inc. also demonstrates substantial independence from the financial markets
since it has no long-term obligations. Common Equity is also stable as a result of the lower
liabilities, another factor that adds to the recession beating performance for the company.
Following good performance from the company in its recession beating year, Apple was
able to gain significantly in value as seen in the Economy Value Added (EAV) for 2007. First for
the calculation, the Weighted Average Cost of Capital (WACC) has to be obtained. Since Apple
carried n long term debt, the WACC was the same as its cost of equity. Applying a Capital Asset
Pricing Model (CAPM) to calculate the cost of equity, and using data from Appendix 1 and
Yahoo finance, can see that:
The risk free rate = 10 year Treasury bond = 4.5%, Market risk premium = 4%, Apple’s beta =
1.7533. By applying CAPM approach, we get
WACC = Apple’s Cost of Equity = 4.5% + (4%)*1.75 = 11.5%

Surname 6

From Apple’s Balance Sheet data, the company EVA for 2007 can be calculated using the
following data as:
EBIT = $4,409 million; Tax Rate = 30%; Cash and Equivalents = $9,352 million;
AR = $4,029 million; Inventories = $346;
Net PropertyPlant and Equipment = $1,832 million; AP = $4,970;
Company’s WACC from earlier calculation = 11.5%;
The EVA calculation is thus as follows:
EVA = EBIT*(1-Tax Rate) – (Total Net Operating Capital) *(WACC)
Apple’s EVA = $4,409*(1-0.3) – ($9,352 + $4,029 + $346 + $1,832 – $4,970) *11.5

== $1,868.56 million.

The high EVA translated to higher levels of Economic Profit, a fact that ensured that Apple
entered the recession on very solid footing. The gains put Apple in a good economic position and
subsequently the company realized strong financial performance.
In conclusion, Apple enjoyed recession beating performance as a result of several factors.
Apple had a strong year in 2007. As a result, the financial recession which began in 2007 was not
enough to affect the company financial position. Figures from the firm’s balance sheet indicate
the company had a good no long term debt coming into the recession, a fact that resulted in
higher Weighted Average Cost of Capital rates and conversely better Economy Value Added.

Surname 7

Apple thus had an advantage coming into the recession compared to her rivals. At the same time,
the company developed some revolutionary new products that kept a steady stream of customers
coming to their store. Products like the iPhone, iPod, as well as a revamped MacBook, all played
their part in driving the company revenues. The lesson that emerges from a case study of Apple
is that the company financial position at any given moment, as well as their overall direction,
play a huge role in its success.

Surname 8

Works Cited

Campello, Murillo, John R. Graham, and Campbell R. Harvey. “The real effects of financial
constraints: Evidence from a financial crisis.” Journal of Financial Economics 97.3
(2010): 470-487.
Graham, John. “What we can learn from a challenging economy: six business lessons from the
recession.” The Journal for Quality and Participation 32.2 (2009): 20.
Michaels, Philip. “Apple: What recession.” Macworld 27.1 (2010): 16.
Razeghi, Andrew J. “Innovating through recession.” Evanston, IL: Northwestern University
(2008).

Surname 9

APPENDIX 1

Q4 2008 UNAUDITED SUMMARY DATA

Q3 2008 Q4 2007

CPU Revenue CPU Revenue

Sequential Change Year/Year Change
Operating Segments Units K $M Units K $M CPU Units Revenue CPU Units Revenue
Americas 1,134 $3,435 965 $2,928 – 1% 4% 16% 22%
Europe 576 1,648 499 1,339 6% 5% 22% 29%
Japan 102 365 72 255 – 24% – 12% 8% 25%
Retail 476 1,445 473 1,251 25% 19% 26% 37%
Other Segments (1) 208 571 155 444 – 1% – 2% 32% 27%

Total Operating Segments 2,496 $7,464 2,164 $6,2175% 6% 21% 27%

Q4 2008
CPU Revenue
Units K $M
1,121 $3,572
611 1,723
78 320
596 1,718
205 562
2,611 $7,895

Surname 10

Product Summary Units K $M Units K $M
Desktops (2) 943 $1,373 817 $1,195
Portables (3) 1,553 2,237 1,347 1,908
Subtotal CPUs 2,496 3,610 2,164 3,103

Units Revenue Units Revenue

• 1% – 1% 15% 14%
  8% 1% 24% 18%
  5% 0% 21% 17%
  iPod 11,011 1,678 10,200 1,619 0% – 1% 8% 3%
  Other Music Related Products and Services (4) 819 601 2% 38%
  iPhone and Related Products & Services (5) 717 419 1,119 118 861% 92% 516% 583%
  Peripherals and Other Hardware 437 346 – 2% 24%
  Software, Service and Other Sales 501 430 10% 28%

Total Apple
$7,464
$6,217

Surname 11

6% 27%
(1) Other Segments include Asia Pacific and FileMaker.
(2) Includes iMac, Mac mini, Mac Pro, PowerMac and Xserve product lines.
(3) Includes MacBook, iBook, MacBook Air, MacBook Pro and PowerBook product lines.
(4) Consists of iTunes Store sales, iPod services, and Apple-branded and third-party iPod accessories.
(5) Units consist of iPhone handset sales; Revenue is derived from handset sales, carrier agreements, and Apple-branded and third-party iPhone accessories.
K: Units in thousands
$M: Amounts in millions