Fast Retailing Cuts Forecast for 2nd Time on J Brand Unit

Fast Retailing Co. (9983), Asia’s biggest clothing retailer, cut its annual profit forecast for a second time in the current fiscal year after suffering losses at its J Brand premium denim unit in the U.S. The shares fell.

The maker of Uniqlo casual apparel said net income will probably be about 78 billion yen ($768 million) for the year ending August, below its previous forecast of 88 billion yen and missing an 88.5 billion yen average estimate from 18 analysts compiled by Bloomberg.

Fast Retailing, which has been seeking overseas growth amid slowing domestic demand, will record a special loss of 10 billion yen for U.S.-based J Brand and may post an impairment charge for the year as the loss-making business didn’t meet target in the third quarter. J Brand, 80 percent-owned by Fast Retailing, sells its premium denim products in more than 2,000 outlets in the U.S., including department stores.

“Affordable luxury brands by and large weren’t doing well,” Chief Financial Officer Takeshi Okazaki said at a press conference in Tokyo yesterday. “The premium market is slowing and the competition is rising, and we couldn’t handle it well. We regret it. We are going to turn it around.”

Shares of Fast Retailing fell 1.9 percent to close at 32,855 yen in Tokyo, the lowest level since May 22. That compares with a 0.3 percent decline in the Nikkei 225 Stock Average.

Photographer: Tomohiro Ohsumi/Bloomberg

Customers shop in a Uniqlo store, operated by Fast Retailing Co., in the Ginza district of Tokyo, Japan. Close

Customers shop in a Uniqlo store, operated by Fast Retailing Co., in the Ginza district of Tokyo, Japan.

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Photographer: Tomohiro Ohsumi/Bloomberg

Customers shop in a Uniqlo store, operated by Fast Retailing Co., in the Ginza district of Tokyo, Japan.

Profit Decline

This is the second time Fast Retailing lowered its annual profit forecast in the current fiscal year. It cut its forecast in April to 88 billion yen from 92 billion yen set in October last year.

President Tadashi Yanai, Japan’s wealthiest man, pared the company’s profit outlook in April as its domestic business faces waning demand. Retail sales dropped 4.3 percent in April after Japan raised its consumption tax that month, easing to a 0.4 percent decline in May, according to data from Japan’s Ministry of Economy, Trade and Industry. Costs for part-time workers, distribution and warehousing has limited growth in the domestic business.

Net income fell 12 percent to 20.28 billion yen in the third quarter ended May, according to Bloomberg calculations derived from the company’s results yesterday. This compares with the 20.2 billion yen average estimate from three analysts compiled by Bloomberg. Sales rose 19 percent to 323.7 billion yen during the three-month period.

Domestic Versus International

Gross profit margin at the domestic Uniqlo business improved 3.9 points to 52.6 percent in the third quarter as the company limited discounting, according to a company presentation. That compares with a 1.2 point decline a year earlier. Operating profit at the Uniqlo business in Japan rose 27 percent to 24.5 billion yen in the quarter this year.

“It’s amazing they improved the margin at the domestic Uniqlo business that much,” Mikihiko Yamato, deputy head of research at JI Asia in Tokyo, said by phone. “The special loss is just one-time, so I wouldn’t be too worried about it.”

Sales at the domestic Uniqlo business, which made up of more than half of the group’s total sales, rose 5.1 percent to 569.4 billion yen in the first nine months of the year. Revenues for the brand’s clothing outside of Japan, which contributed 30 percent to the group, climbed 71 percent to 327.7 billion yen.

Fast Retailing’s Japanese casual-wear GU brand and Uniqlo’s operations in Southeast Asia also performed below expectations, the company said yesterday. Uniqlo’s U.S. unit continues to make losses because of the cost of opening more stores, it added.

Expansion Blitz

Yanai, who built Fast Retailing from the casual clothing maker and retailer he inherited from his father, plans to turn the company into the world’s largest clothing retailer and has set a target of 5 trillion yen in sales by 2020.

The executive has said he plans to open 200 to 300 outlets overseas annually, including between 20 to 30 new stores a year in the U.S, as Uniqlo embarked on an overseas expansion blitz.

Fast Retailing forecast in April Uniqlo international sales will increase 59 percent to 400 billion yen by the end of the fiscal year to August, while it expected revenues to climb 5 percent to 715 billion yen for the domestic outlets.

The number of overseas Uniqlo outlets increased by 188 to 598 stores as of end-May, of which about half are in China, the company said yesterday. It had 841 directly run domestic stores, eight more than a year earlier.

Yanai, with a net worth of $17 billion according to the Bloomberg Billionaires Index, is also in the process of changing 16,000 part-timers’ contracts at Uniqlo in Japan to full time to maintain a stable workforce, potentially lifting its labor costs.

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 Daryl Loo, Drew Gibson

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