Oct. 10 (Bloomberg) -- Fast Retailing Co. Chief Executive Officer Tadashi Yanai, Japan's fifth-richest man, said opening a New York flagship store will pave the way for his Uniqlo clothes to break into the $2.2 trillion U.S. retail market.

``New York is the best place in the world to test our business,'' Yanai, 57, said in an interview. ``There are bigger markets beyond Japan. I want to win against the world's toughest competition.''

Fast Retailing will open its largest-ever store in New York's Soho district on Nov. 10, competing for customers with Gap Inc. and Inditex SA, owner of the Zara brand. The Yamaguchi, western Japan-based company aims to more than double sales to 1 trillion yen ($8.4 billion) by 2010 and increase the overseas portion to 10 percent from 6 percent.

``Fast Retailing does have the balance sheet strength to invest in overseas expansion,'' said Alex Godwin, a fund manager at Edinburgh-based Standard Life Investments, which manages $3 billion in Japanese equities. ``Whether this can be achieved with decent margins remains uncertain.''

Gap's market value is $15.9 billion compared with $10 billion for Fast Retailing, which had an operating margin last year of 14.8 percent against the San Francisco-based retailer's 10.9 percent, according to Bloomberg data.

Shares of Fast Retailing, which have doubled in value since June 2005, were trading at 0.5 percent lower to 11,330 yen as of 10:19 a.m. in Tokyo.

Taking Manhattan

Yanai said his goal is to turn the company he founded 34 years ago into the world's largest clothing retailer.

Fast Retailing opened New York stores outside of Manhattan last year for ``marketing purposes,'' and then a test shop in Soho. Yanai decided to create his company's biggest outlet in that area, a fashion mecca, directly competing against global brands such as Gap, the largest U.S. clothing chain, and Zara.

``Prices are very, very cheap,'' said Peter Mitchell, 36, an attorney in New York, after shopping at the test Uniqlo shop in Soho. ``It's a mixture of stylish and simple. They're good clothes for everyday use.'' Mitchell paid $70 for two shirts, socks, trousers and underwear.

To widen Uniqlo's appeal, Fast Retailing in August started selling items created by internationally recognized designers including Felipe Oliveira Baptista and Nicolas Andreas Taralis. The company set up design teams in New York, Tokyo, Paris and Milan, hiring staff from Prada Holding NV, Barneys New York Inc. and Gap's Old Navy unit.

Fast Retailing also wants to open flagship stores in Paris and London before 2010, Yanai said. The company had 1,421 stores worldwide, including the U.K., South Korea, Hong Kong, China and the U.S., as of May 31.

Strong Competition

Still, Yanai admitted winning customers from established brands in the world's most competitive retail market -- and the world itself -- won't be easy.

Fast Retailing's net income rose 8.5 percent to 9.1 billion yen in the three months ended May 31. It expects net profit in the year to Aug. 31 to rise 18 percent to 40 billion yen and sales to surge 16 percent to 444.9 billion yen when it reports on Oct. 12.

Sales at Gap, which owns brands including Gap, Banana Republic and Old Navy, were unchanged at $3.72 billion in the second quarter. The company had 3,085 stores as of July 29.

Inditex, Europe's largest clothing retailer, had a 19 percent gain in second-quarter profit to 144.1 million euros ($182.3 million) after adding Zara and Bershka stores outside its home market of Spain. The Arteixo, Spain-based retailer has almost tripled the number of stores in the past six years to more than 2,900, including 19 in the U.S.

``It will be tough for a casual clothing company like Fast Retailing to expand sales in the U.S.,'' said Makoto Haga, who helps manage 40 billion yen at STB Asset Management Co. in Tokyo. ``It doesn't have a branding power and it's not high-end.''

Rising incomes and a recent drop in gasoline prices may give Americans extra cash to spend on other goods. U.S. retail sales excluding automobiles rose 0.2 percent in August after a 0.6 percent gain in July.

Bursting Bubble

Fast Retailing's overseas expansion plans were thwarted a decade ago by the collapse of Japan's bubble economy and seven years of falling prices, said Yanai, who according to Forbes magazine has personal wealth of $4.2 billion and owns 26.7 percent of Fast Retailing.

``Without globalization, the companies and the people here can't survive as we live in an isolated island country,'' he said.

After graduating from Waseda University with a bachelor degree in economics in 1971, Yanai joined Aeon Co., Japan's largest retailer by sales, where he stayed less than a year. He joined and later took over his father's men's clothing business and opened his first Uniqlo shop in Hiroshima, western Japan, in 1984.

`Fleece Jacket Boom'

Fast Retailing was listed on the main board of the Tokyo Stock Exchange in 1999, the year after it created a ``fleece jacket boom,'' which pushed sales to a record of 418.5 billion yen in the 12 months ended Aug. 31, 2001.

When the boom collapsed, the company had 22 straight monthly declines of same-store sales from October 2001 to July 2003.

``We stayed too focused on selling a single item,'' Yanai said. ``Our strength is quality, so now we're strengthening the company's ability to match trends.''

In February, Fast Retailing bought Petit Vehicule SA, which produces the Princesse Tam.Tam lingerie brand, for about 59 million euros, and in June purchased Nelson Finance SAS, the maker of Comptoir Des Cotonniers casual clothing, for about 185 million euros.

Talks to buy Hong Kong's Giordano International Ltd. collapsed last month.

``I want to expand overseas business by acquisitions and by expanding our group stores, such as Uniqlo,'' Yanai said.

Yanai said he's not worried about raising funds for investments. Fast Retailing had 141.4 billion yen in cash and 13.8 billion yen in debt as of May 31, according to the company's statements.

``We recover the costs of investments quickly, usually in a few years,'' he said.

To contact the reporter on this story: Yasue Aoi in Tokyo yaoi@bloomberg.net.

Last Updated: October 9, 2006 21:26 EDT