Apple 2006 Annual Report Download - page 30

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depreciation of store construction costs, and lease expense. As a result, significant losses would result should the Retail segment experience a
significant decline in sales for any reason.
Certain of the Company’s stores have been designed and built to serve as high-profile venues that function as vehicles for general corporate
marketing, corporate events, and brand awareness. Because of their unique design elements, locations and size, these stores require
substantially more investment in equipment and leasehold improvements than the Company’s more typical retail stores. The Company has
opened eight such stores through September 2006. Because of their location and size, these high-profile stores also require the Company to
enter into substantially larger operating lease commitments compared to those required for its more typical stores. Current leases on such
locations have terms ranging from 10 to 14 years with total remaining commitments per location ranging from $4 million to $33 million.
Closure or poor performance of one of these high-profile stores could have a significant negative impact on the Company’s results of
operations and financial condition.
Many of the general risks and uncertainties the Company faces could also have an adverse impact on its Retail segment. Also, many factors
unique to retail operations present risks and uncertainties, some of which are beyond the Company’s control, that could adversely affect the
Retail segment’s future results, cause its actual results to differ from those currently expected, and/or have an adverse effect on the Company’s
consolidated results of operations. Potential risks and uncertainties unique to retail operations that could have an adverse impact on the Retail
segment include, among other things, macro-economic factors that have a negative impact on general retail activity; inability to manage costs
associated with store construction and operation; inability to sell third-party hardware and software products at adequate margins; failure to
manage relationships with existing retail channel partners; lack of experience in managing retail operations outside the U.S.; costs associated
with unanticipated fluctuations in the value of Apple-branded and third-party retail inventory; and inability to obtain and renew leases in
quality retail locations at a reasonable cost.
Investment in new business strategies and initiatives could disrupt the Company
’s ongoing business and may present risks not originally
contemplated.
The Company has and may in the future invest in new business strategies or engage in acquisitions that complement the Company’s strategic
direction and product roadmap. Such endeavors may involve significant risks and uncertainties, including distraction of management’s
attention away from current business operations; insufficient revenue generation to offset liabilities assumed and expenses associated with the
strategy; and unidentified issues not discovered in the Company’s due diligence process. Because these new ventures are inherently risky, no
assurance can be given that such strategies and initiatives will be successful and will not materially adversely affect the Company’s business,
operating results or financial condition.
Declines in the sales of the Company
’s professional products, software, accessories, or service and support contracts, or increases in sales of
consumer products, including iPods, may negatively impact the Company’s gross margin and operating margin percentages.
The Company’s professional products, including MacBook Pro and Mac Pro systems, software, accessories, and service and support contracts,
generally have higher gross margins than the Company’s consumer products, including the iMac, Mac mini, MacBook, iPod, and content from
the iTunes Store. A shift in sales mix away from higher margin professional products towards lower margin consumer products could adversely
affect the Company’s future gross margin and operating margin percentages. The Company’s traditional professional customers may choose to
buy consumer products, specifically the iMac and MacBook, instead of professional products. Professional users may choose to buy the iMac
due to its relative price performance and unique design featuring a flat panel screen. Professional users may also choose to purchase MacBooks
instead of the Company’s professional-oriented portable products due to their price performance and screen size. Additionally, significant
future growth in iPod sales without
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