Apple 2004 Annual Report Download - page 102

related adjustments not included in segment cost of sales, including variances between standard and actual manufacturing costs and the mark-up
above standard cost for product supplied to the Retail segment, are included in corporate expenses.
Management assesses the operating performance of the Retail segment differently than it assesses the operating performance of the Company's
geographic segments. The Retail segment revenue and operating income is intended to depict a comparable measure to that of the Company's
major channel partners in the U.S. operating retail stores so the Company can evaluate the Retail segment performance as if it were a channel
partner. Therefore, the Company makes three significant adjustments to the Retail segment for management reporting purposes that are not
included in the results of the Company's other segments.
First, the Retail segment's operating income includes cost of sales for Apple products at an amount normally charged to major channel partners
in the U.S. operating retail stores, less the cost of sales programs and incentives provided to those channel partners and the Company's cost to
support those partners. For the years ended September 25, 2004, September 27, 2003, and September 28, 2002, this resulted in the recognition of
additional cost of sales above standard cost by the Retail segment and an offsetting benefit to corporate expenses of approximately $213 million,
$106 million, and $52 million, respectively.
Second, the Company's extended warranty, support and service contracts are transferred to the Retail segment at the same cost as that charged to
the Company's major retail channel partners in the U.S., resulting in a comparable measure of revenue and gross margin between the Company's
Retail stores and those retail channel partners. The Retail segment recognizes the full amount of revenue and cost of sales at the time of sale of
the Company's extended warranty, support and service contracts. Because the Company has not yet earned the revenue or incurred the costs
associated with the sale of these contracts, an offset to these amounts is recognized in other operating segments' net sales and cost of sales. For
the year ended September 25, 2004, this resulted in the recognition of net sales and cost of sales by the Retail segment, with corresponding
offsets in other operating segments, of $54 million and $37 million, respectively. For the year ended September 27, 2003, the net sales and cost
of sales recognized by the Retail segment for sales of extended warranty, support and service contracts were $30 million and $20 million,
respectively. For the year ended September 28, 2002, this resulted in the recognition of net sales and cost of sales by the Retail segment of
$8 million and $6 million, respectively.
Third, the Company has opened six high profile stores in New York, Los Angeles, Chicago, San Francisco, Tokyo, Japan and Osaka, Japan as of
September 25, 2004 and has an additional store under development in London, England, which is expected to open by the end of calendar year
2004. These high profile stores are larger than the Company's typical retail stores and were designed to further promote brand awareness and
provide a venue for certain corporate sales and marketing activities, including corporate briefings. As such, the Company allocates certain
operating expenses associated with these stores to corporate marketing expense to reflect the estimated benefit realized Company-wide. The
allocation of these operating costs is based on the excess amount incurred for a high profile store to that of a more typical Company retail
location. Expenses allocated to corporate marketing resulting from the operations of these stores were $16 million, $6 million and $1 million for
the years ended September 25, 2004, September 27, 2003, and September 28, 2002 respectively.
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