Apple 2005 Annual Report Download - page 95

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11—Segment Information and Geographic Data (Continued)
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 measure comparable 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 24, 2005, September 25, 2004, and September 27, 2003, 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 $435
million, $213 million, and $106 million, respectively.
Second, the Company’s service and support 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 measure of revenue and gross margin for those items that is comparable between the
Company’s Retail stores and those retail channel partners. The Retail segment recognizes the full amount of revenue and cost of sales of the
Company’s service and support contracts at the time of sale. 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 24, 2005, this resulted in the recognition of net sales and cost of sales by the Retail segment, with corresponding
offsets in other operating segments, of $92 million and $64 million, respectively. For the year ended September 25, 2004, the net sales and cost
of sales recognized by the Retail segment for sales of service and support contracts were $54 million and $37 million, respectively. For the year
ended September 27, 2003, this resulted in the recognition of net sales and cost of sales by the Retail segment of $30 million and $20 million,
respectively.
Third, the Company has opened seven high profile stores in New York, Los Angeles, Chicago, San Francisco, Tokyo, Japan, Osaka, Japan, and
London, England as of September 24, 2005. 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 amount incurred for a high profile store in excess of that
incurred by a more typical Company retail location. Expenses allocated to corporate marketing resulting from the operations of these stores
were $31 million, $16 million, and $6 million for the years ended September 24, 2005, September 25, 2004, and September 27, 2003,
respectively.
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