When Apple reported fiscal third quarter earnings, on July 30, the conversation revolved around income statement performance. In other words: how well the iPhone had sold, how much revenue growth the services segment experienced, how margins behaved, etc.
But one balance sheet item caught my attention. Despite the 11% increase in product revenues in the quarter, Apple’s inventory dropped by over 3% year over year. Even in an environment of demand uncertainty and disruptions caused by the COVID-19 crisis, Apple seems to have managed its supply chain tightly.
A couple of months ago, I talked about how Apple’s inventory management practices have been world class. CEO Tim Cook’s attitude towards it helps to explain the company’s obsession:
The graph below shows that Apple’s key inventory metrics have remained relatively stable since early 2019, despite all that has happened this year so far. As a percentage of total assets, inventory saw a minor year-over-year bump to less than 3% in the most recent quarter that still looked impressive. For reference, Intel’s comparable metric was over 20% in the second period of 2020, while Sony’s reached 10%.
Apple’s days inventory outstanding, which measures how long inventory sits in stock before being sold, also increased slightly in 2020 over last year’s levels. Yet, the less than 10 days on average have been substantially better than Sony’s and Intel’s one month or longer.
The benefit of keeping inventory levels so low is twofold. First, large inventory balances mean that cash remains tied up in the supply chain, which is usually not good news. Part of the reason why Apple has managed to generate so much cash in the past decade or more is the company’s ability to manage working capital (which includes inventory) so well.
Second, low inventories allow Apple to be more nimble. With the multiple product refreshes each year, the Cupertino company can afford to have the latest devices available for purchase without having to discount older models too deeply, or risk having its product stock become obsolete.
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