Apple 2012 Annual Report Download - page 36

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$43.3 million in 2011 compared to $34.1 million in 2010. The Retail segment represented 13% and 15% of the
Company’s total net sales in 2011 and 2010, respectively.
The Retail segment’s operating income was $4.7 billion, $3.2 billion, and $2.3 billion during 2012, 2011, and
2010 respectively. These year-over-year increases in Retail operating income were primarily attributable to
higher overall net sales that resulted in significantly higher average revenue per store during the respective years.
Gross Margin
Gross margin for 2012, 2011 and 2010 are as follows (in millions, except gross margin percentages):
2012 2011 2010
Net sales ........................................................ $156,508 $108,249 $65,225
Cost of sales ..................................................... 87,846 64,431 39,541
Gross margin .................................................... $ 68,662 $ 43,818 $25,684
Gross margin percentage ........................................... 43.9% 40.5% 39.4%
The gross margin percentage in 2012 was 43.9%, compared to 40.5% in 2011. This year-over-year increase in
gross margin was largely driven by lower commodity and other product costs, a higher mix of iPhone sales, and
improved leverage on fixed costs from higher net sales. The increase in gross margin was partially offset by the
impact of a stronger U.S. dollar. The gross margin percentage during the first half of 2012 was 45.9% compared
to 41.4% during the second half of 2012. The primary drivers of higher gross margin in the first half of 2012
compared to the second half are a higher mix of iPhone sales and improved leverage on fixed costs from higher
net sales. Additionally, gross margin in the second half of 2012 was also affected by the introduction of new
products with flat pricing that have higher cost structures and deliver greater value to customers, price reductions
on certain existing products, higher transition costs associated with product launches, and continued
strengthening of the U.S. dollar; partially offset by lower commodity costs.
The gross margin percentage in 2011 was 40.5%, compared to 39.4% in 2010. This year-over-year increase in
gross margin was largely driven by lower commodity and other product costs.
The Company expects to experience decreases in its gross margin percentage in future periods, as compared to
levels achieved during 2012, and the Company anticipates gross margin of about 36% during the first quarter of
2013. Expected future declines in gross margin are largely due to a higher mix of new and innovative products
with flat or reduced pricing that have higher cost structures and deliver greater value to customers and anticipated
component cost and other cost increases. Future strengthening of the U.S. dollar could further negatively impact
gross margin.
The foregoing statements regarding the Company’s expected gross margin percentage in future periods,
including the first quarter of 2013, are forward-looking and could differ from actual results because of several
factors including, but not limited to those set forth above in Part I, Item 1A of this Form 10-K under the heading
“Risk Factors” and those described in this paragraph. In general, gross margins and margins on individual
products will remain under downward pressure due to a variety of factors, including continued industry wide
global product pricing pressures, increased competition, compressed product life cycles, product transitions and
potential increases in the cost of components, as well as potential increases in the costs of outside manufacturing
services and a potential shift in the Company’s sales mix towards products with lower gross margins. In response
to competitive pressures, the Company expects it will continue to take product pricing actions, which would
adversely affect gross margins. Gross margins could also be affected by the Company’s ability to manage
product quality and warranty costs effectively and to stimulate demand for certain of its products. Due to the
Company’s significant international operations, financial results can be significantly affected in the short-term by
fluctuations in exchange rates.
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