Not So Fast
Tadashi Yanai is a man in a hurry.
The Fast Retailing chairman has said he wants to make the owner of Uniqlo the world's biggest seller of clothing, and has long yearned to hit a target of 5 trillion yen ($48 billion) in annual sales by 2020. Now that he's admitted that's not going to be achievable, how's he going to cope with an era of lower growth?
Fast Retailing's headlong pace of expansion has long helped justify its shortcomings relative to major competitors Hennes & Mauritz and Zara-owner Inditex. Despite a premium valuation of 31 times forecast earnings 1 next to Inditex's 28 times and H&M's 20 times, operating margins are about half those of its rivals -- and there's evidence that all those new stores aren't adding profitable growth.
A decade ago, Uniqlo was almost exclusively a Japanese chain. The change since then has been dramatic. Yanai has added just 89 stores in his home market, but overseas has opened 919. The majority of Uniqlo outlets are now outside Japan.
If only the same could be said of its profits. Uniqlo's international network posted 37.4 billion yen of operating income in annual results announced Thursday, compared with 102 billion yen at home.
Why is the overseas network so much less profitable? It's surprisingly hard to say. Like many Japanese retailers, Fast Retailing provides investors with laudably detailed data on its domestic chains. Those who care to look can find same-store sales, foot traffic, and basket sizes broken down month-by-month. The overseas network is considerably more opaque.
While there are regular references to international same-store sales in Fast Retailing's earnings statements, there's no consistent set of data to match the information for Japan, making it maddeningly hard to pick apart how the overseas network is performing. 2 One thing is clear, though: The average store brings in significantly less than its equivalent back home, and the gap appears to be widening.
Given Fast Retailing's costly stumbles in its attempted expansion into the U.S., that paucity of detail is worrying. What's clear, either way, is that the company is in the process of turning itself from a rather profitable Japanese apparel chain into a significantly less profitable global one. Operating margins at Uniqlo Japan came to 13 percent in the most recent fiscal year, more than double the 5.7 percent in its international operations.
The one hope is that slower sales growth will make Yanai think twice about his obsession with boosting the top line. Companies seeking to increase profits generally choose between spurring revenue by reducing margins, or improving margins by reining in revenue growth. Fast Retailing, with low margins and low growth, is achieving neither.
That's undermining its ability to turn an economic profit. While H&M and Inditex have been returning 33 percent and 29 percent respectively on their invested capital, Fast Retailing makes 7.8 percent. That's enough to cover its cost of capital, but there's significantly less margin for error compared with rivals.
In that sense, Fast Retailing's abandonment of its sales growth targets might be a good thing. If Yanai gives up his obsession with revenue growth, he might get a chance to think harder about building a more profitable business.
Based on blended forward 12-month price-earnings ratios.
One justification for this might be that the international network is growing so fast that it's hard to make reasonable yearn-on-year comparisons. But there have been more than 500 overseas stores for more than three years now, giving a perfectly adequate sample size for investors who want a window on the international network's performance.
To contact the author of this story:
David Fickling in Sydney at firstname.lastname@example.org
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