Fast Retailing Drops in Tokyo After Profit Forecast Cut

Fast Retailing Co. (9983), Asia’s biggest clothing retailer, fell the most in 10 months in Tokyo trading after lowering its annual profit forecast, citing higher costs and weak demand.

Net income will be about 88 billion yen ($866 million) for the year ending August, lower than a previous forecast of 92 billion yen, the Yamaguchi, Japan-based company said yesterday. That compared with the 94.5 billion-yen average of 19 analyst estimates compiled by Bloomberg.

The company’s billionaire President Tadashi Yanai pared the profit outlook after spending more on salaries and expanding overseas, opening Uniqlo stores in New York, Paris, Shanghai and Jakarta to boost sales as a consumption tax increase begun April 1 in Japan damps demand. Costs for part-time workers, distribution and warehousing rose in the first half, while a last-minute surge in sales before the tax increase failed to materialize, the company said yesterday.

“I don’t have an optimistic view about consumption in Japan,” Yanai told reporters yesterday in Tokyo. He said he had yet to see an effect on sales from the tax increase.

The retailer dropped 7.9 percent, the biggest decline since June, to 33,820 yen with trading volume more than triple the three-month average as of the close in Tokyo today. Japan’s benchmark Nikkei 225 Stock Average (NKY) dropped 2.4 percent.

Photographer: Yuriko Nakao/Bloomberg

Billionaire Tadashi Yanai, chairman, president and chief executive officer of Fast Retailing Co., speaks during a news conference in Tokyo on April 10, 2014. Close

Billionaire Tadashi Yanai, chairman, president and chief executive officer of Fast... Read More

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Photographer: Yuriko Nakao/Bloomberg

Billionaire Tadashi Yanai, chairman, president and chief executive officer of Fast Retailing Co., speaks during a news conference in Tokyo on April 10, 2014.

High Multiple

Fast Retailing’s price fell to about 37 times estimated earnings per share, still the highest multiple among the 10 largest global apparel retailers, according to data compiled by Bloomberg. Larger rival Inditex SA, operator of the Zara chain, trades at 26 times projected profit, while Hennes & Mauritz AB (HMB) is at 23 times.

“The multiple is just too high” for Fast Retailing, Dairo Murata, an analyst at JPMorgan Securities Japan Co. said by phone today. He rates the shares neutral, the equivalent of hold.

The Japanese economy is forecast to shrink an annualized 3.5 percent in the quarter started April, when the sales tax rose to 8 percent from 5 percent, according to a Bloomberg News survey of economists in March.

The last time Japan increased the consumption levy, in 1997, the economy fell into recession. This time, the government has designed a 5.5 trillion yen stimulus package to counter the expected decline in consumer spending, and is holding off on a decision to increase the tax further to 10 percent starting next year.

Widening Decline

SoftBank Corp., the mobile phone carrier accounting for 5.8 percent of the Nikkei by index weighting, dropped 3.8 percent, while the broader Topix index fell for a sixth day, capping its biggest weekly slump since June.

Photographer: Tomohiro Ohsumi/Bloomberg

A customer walks past Ultra Light Down jackets displayed for sale in a Uniqlo store, operated by Fast Retailing Co., in the Ginza district of Tokyo. Close

A customer walks past Ultra Light Down jackets displayed for sale in a Uniqlo store,... Read More

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Photographer: Tomohiro Ohsumi/Bloomberg

A customer walks past Ultra Light Down jackets displayed for sale in a Uniqlo store, operated by Fast Retailing Co., in the Ginza district of Tokyo.

Yanai has vowed to boost sales in Japan by raising the functional clothing maker’s image inside the country to match the trendier profile it has achieved in the U.S., Europe and China by opening flagship stores in prime shopping districts and sponsoring tennis stars Novak Djokovic and Kei Nishikori along with golfer Adam Scott.

The retailer’s moves inside Japan, including a greater emphasis on higher-priced items such as cashmere sweaters and down jackets, have come amid rising costs and an economic recovery that has yet to prompt broad increases in wages and consumer spending.

M&A Driver

As demand in Japan wanes, Yanai faces a dilemma over how to boost sales while maintaining margins and Fast Retailing’s improved reputation for quality, Oliver Matthew and Jun Kato, analysts at CLSA Asia-Pacific Markets, wrote in a note to clients. Under the circumstances, mergers and acquisitions are a key driver, Matthew and Kato wrote.

Fast Retailing is in early talks about a potential acquisition of J. Crew Group Inc., the U.S. retailer owned by TPG Capital and Leonard Green & Partners LP, two people with knowledge of the matter said Feb. 28. The deal may be valued at as much as $5 billion, one of the people said earlier.

Photographer: Brent Lewin/Bloomberg

A pedestrian walks past the Fast Retailing Co. Uniqlo Lee Theatre flagship store in Hong Kong. Close

A pedestrian walks past the Fast Retailing Co. Uniqlo Lee Theatre flagship store in Hong Kong.

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Photographer: Brent Lewin/Bloomberg

A pedestrian walks past the Fast Retailing Co. Uniqlo Lee Theatre flagship store in Hong Kong.

“Fast Retailing and J. Crew both have a lot to gain by joining up,” Matthew and Kato of CLSA wrote.

Yanai, who built Fast Retailing from the casual clothing maker and retailer he inherited from his father, is Japan’s richest person with a net worth of $18.5 billion, according to the Bloomberg Billionaires Index. He has said he wants to build the company into the world’s largest clothing retailer and has set a target of 5 trillion yen in sales by 2020.

Eroding Margins

Fast Retailing’s net income dropped 15 percent to 23 billion yen in the second quarter ended February, as calculated from first-half earnings the company reported yesterday. Sales climbed 26 percent to 375.3 billion yen in the three-month period, while operating profit fell to 39.2 billion yen from 40 billion yen a year earlier, the company said.

The company’s operating margin slumped 23 percent from a year earlier to 10 percent in the second quarter, according to data compiled by Bloomberg. The margin was 17 percent in the second quarter of 2012, the data show.

Fast Retailing’s global brand operations division includes Theory Comptoir des Cotonniers, Princesse Tam.Tam and J Brand, accounting for about 16 percent of sales in the six months ended in February. Uniqlo, the company’s mainstay casual apparel chain that sells only its own brand, brought in about 83 percent of revenue in the period, according to the company.

Operating income at the domestic Uniqlo business will probably be 100 billion yen this year, the company said yesterday, 13 percent less than previously forecast.

Labor Costs

Sales are expected to slow in the fiscal second half, while costs for labor, transportation and warehouses will increase, Chief Financial Officer Takeshi Okazaki said yesterday, without elaborating.

The retailer said last month it plans to change 16,000 part-timers’ contracts at Uniqlo in Japan to full time to maintain a stable workforce.

“The rising labor cost concerns me a little,” said Takashi Aoki, a Tokyo-based fund manager at Mizuho Asset Management Co. “If it leads to higher productivity, it’s not a bad decision.”

A gauge of economic expectations of people such as taxi drivers and restaurant workers tumbled to 34.7 in March from 40 a month earlier, according to the Economy Watchers survey released April 8 by the Cabinet Office in Tokyo.

Currency Benefit

Fast Retailing also benefited less from currency fluctuations in the first half as the yen’s depreciation has slowed. Profit related to foreign exchange dropped by 6.4 billion yen in the six months ended February, according to yesterday’s statement.

Yanai has said he intends to increase outlets in China, the company’s biggest market outside Japan, to 1,000 from 267 as of March.

Fast Retailing had 17 outlets in the U.S. as of March and aims to open between 20 and 30 new stores a year in the country, with a goal of 100 outlets.

Yanai earlier this year announced hirings of executives from retailers including Wal-Mart Stores Inc., Esprit Holdings Ltd., Express Inc. and Juicy Couture to speed decision-making and strengthen overseas businesses.

To contact the reporter on this story: Yuki Yamaguchi in Tokyo at yyamaguchi10@bloomberg.net

To contact the editors responsible for this story: Stephanie Wong at swong139@bloomberg.net Dave McCombs

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