Fast Retailing Cuts Net Forecast as Hit Products Fade

Tadashi Yanai, CEO of Fast Retailing
Tadashi Yanai, chairman, president and chief executive officer of Fast Retailing Co., speaks while visiting Shanghai, China. Photographer: Kevin Lee/Bloomberg

Fast Retailing Co., Asia’s biggest clothing retailer, cut its profit forecast as sales growth slowed the most in four years on the waning popularity of designs at its Uniqlo chain.

The company cut its net income estimate 4.9 percent to 67.5 billion yen ($763 million) for the year ending August, it said in a statement today. “There was a problem with our marketing, so we will improve our marketing right away,” Chief Financial Officer Hidetsugu Onishi said at a briefing in Tokyo today.

The operator of the Uniqlo chain has lost 27 percent of its market value this year, making it the biggest loser among retailers in the MSCI Asia Pacific Index this year. President Tadashi Yanai, Japan’s richest man, has cut prices to offset a lack of hit products such as the 50 million items of HeatTech thermal wear sold last winter, and the 9 million Bra Top camisoles sold last year.

“Uniqlo hasn’t got a mega hit product this year unlike the past few seasons,” said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments Ltd. in Tokyo. “No one can keep wearing just Uniqlo, which is often basic, even as they are feeling the pinch on their pocketbooks.”

Confusing Customers

Fast Retailing also lowered its full-year sales estimate 2.3 percent to 815 billion yen. Cold weather, confusing customers with too many designs and insufficient stock of popular products also hurt Uniqlo’s same-store sales, Onishi said.

Yamaguchi, Japan-based Fast Retailing fell 0.1 percent to close at 12,720 yen on the Tokyo Stock Exchange. The benchmark Topix index jumped 2.3 percent. The stock surged 35 percent last year and 63 percent in 2008.

Sales increased 4.7 percent to 188.1 billion yen in the three months ended May. That would be the weakest growth since at least the quarter ended November 2006. Net income fell 16 percent to 11.8 billion yen last quarter. The figures were derived by subtracting first-half results from nine-month earnings the company announced today.

Sales at Uniqlo stores open at least a year fell 16 percent in March, the most in seven years, and 12 percent in April. They rose 3.1 percent in May when the company cut the prices of jeans and polo shirts to 990 yen from 1,990 yen for three days. The slump returned in June and sales fell 5.8 percent amid weak demand for Uniqlo’s summer lines.

Japan Unemployment

Comparable or same-store sales strip out the effect of newly opened outlets. Uniqlo had 809 stores in Japan, accounting for 86 percent of the total 944 outlets, as of May 31.

Government reports last week showed the unemployment rate in the world’s second-biggest economy reached a five-month high of 5.2 percent in May, while household spending fell for a second month.

Still, some of Fast Retailing’s competitors performed better.

Casual-clothing chain United Arrows Ltd.’s comparable sales at its 182 Japan stores gained every month from April, rising 0.8 percent last month. Honeys Co., with 887 clothing stores in Japan, increased sales by 1.1 percent in June.

Yanai, who is 61 and holds a 27 percent stake in the company, is trying to boost Uniqlo sales by introducing new products including Sarafine and Silky Dry underwear.

Fast Retailing derived 92 percent of operating profit in Japan in the three months ended February, compared with 98 percent in the quarter ended November 2008, according to data compiled by Bloomberg. In the nine months through May, the company earned 95 percent of operating profit in Japan.

Overseas Expansion

The company started expanding abroad in 2001, opening stores in the U.K. to reduce its reliance on Japan, where consumer spending has stagnated as the population ages and declines. It opened a store in New York’s Soho district in 2006 and across the road from Paris’ Galeries Lafayette department store last year.

Fast Retailing expects overseas sales to overtake domestic revenue as soon as 2014, driven by the opening of Uniqlo stores in China and South Korea, Yanai said in March.

“It will take at least three years for Fast Retailing’s overseas sales to contribute to the company’s profit,” said Mikihiko Yamato, an analyst at Japaninvest KK, who has a “neutral” rating on the stock.

Yanai said in May he will increase Uniqlo stores in China to 1,000 within 10 years, from 47 outlets in February. The company plans to open a store on New York’s Fifth Avenue and to enter Malaysia.

“Real growth will come from overseas sales, but it won’t be easy,” said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo, which manages about $3 billion. While “it has a strong balance sheet, good management and can do well over the long term,” Fast Retailing is still in the early stages of overseas expansion, he said.

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