Not So Fast

Fast Retailing's headlong pursuit of top-line growth is becoming harder to justify.
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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?

Hard to Tell if Anything Is Goin' to Sell

Fast Retailing's sales growth has slowed sharply just as its rivals are accelerating

Source: Bloomberg

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.

Not Selling Any Alibis

Fast Retailing's trailing 12-month operating margins have long trailed rival fashion chains. If that's not buying faster sales growth, what's the point?

Source: Bloomberg

Note: Companies have different year ends: Fast Retailing in August, Inditex in January, Hennes & Mauritz in November. Inditex figures have been moved forward one month to ensure consistent quarterly periods.

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.

The Reason I'm A-Travelin' On

Fast Retailing has been expanding its overseas store network to escape Japan's demographic decline

Source: Bloomberg

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.

Once Upon a Time You Dressed So Fine

Operating income per store at Uniqlo's overseas network has long trailed its domestic outlets, and the gap is widening

Source: Bloomberg, company reports

Note: Based on operating income divided by average of start-of-year and year-end store numbers

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.

Something Is Happening Here, But You Don't Know What It Is

It's hard to justify Fast Retailing's premium valuation, given returns relative to capital costs that are among the lowest for major apparel retailers

Source: Bloomberg

Note: Shows apparel retailers with at least $10 billion in trailing 12-month revenue. Weighted average cost of capital/return on invested capital ratios of less than 1 represent economic losses to the company.

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.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Based on blended forward 12-month price-earnings ratios.

  2. 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

To contact the editor responsible for this story:
Matthew Brooker at

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