Fast Retailing: Back To The Fast Track

When Fast Retailing Co.'s brash CEO, Tadashi Yanai, predicted back in 2001 that the clothing company would be "bigger than Gap," it seemed a bold claim even for a company that had grown fivefold in four years. The skeptics no doubt felt vindicated when sales at Fast Retailing's Uniqlo chain of stores abruptly slowed two years ago. As of August, 2003, revenue was down 25% as expansion plans badly misfired. The slump wiped out 80% of the stock price.

Today, Fast Retailing, based in Yamaguchi in western Japan, is showing it has the resilience to match its founder's boldness. The company, which sells inexpensive casual clothing at 630 no-frills Uniqlo outlets across Japan, has restructured and is making an impressive comeback. "Getting their fingers burnt has been a great lesson," says David Marra, a principal at A.T. Kearney Inc. in Tokyo. "They have undergone a magnificent transition."

Investors certainly seem to think so. In the past 12 months, Fast Retailing's stock has catapulted from $35 to $80 on the back of better-than-expected results. That moved it from No. 977 to No. 705 on BusinessWeek's Global 1000 ranking. Nomura Securities Co. figures the company's operating profits will reach $570 million for the year ending in August, with a profit margin of 18.3%, vs. 13.3% last year. "The share-price movement is all about their improved earnings performance," says Masafumi Shoda, an analyst at Nomura Securities in Tokyo. He rates Fast Retailing a buy.

The company hit a wall when its made-in-China apparel lines suddenly fell out of favor with Japan's fickle young consumers, sending sales tumbling from $3.86 billion in 2001 to $2.86 billion last year. Yanai drafted 41-year-old Genichi Tamatsuka, a vice-president, as chief operating officer and president. Yanai then stepped back and let Tamatsuka redesign Uniqlo's offerings. The changes include a greater emphasis on women's lines and the use of cashmere and other upmarket fabrics at reasonable prices. The revamp is expected to push up net sales 10%, to $3.2 billion, for the year that ends in August. "We need to make sure we introduce something new and better every season," says Tamatsuka.

Just as important, management hasn't been afraid to pull the plug on losers. In June an ill-fated venture in which Fast Retailing tried to apply Uniqlo's vertically integrated model to the fresh-produce business was closed down, at a loss of $25 million. Yanai and Tamatsuka also shut most of Uniqlo's 21 British stores, leaving just five outlets in the London area and reversing a loss to breakeven. "They showed that they weren't the typical Japanese company that would stay in the game even if they were losing money," says Kearney's Marra.

One potential problem is that Yanai, who owns 26% of the company, hasn't lost his yearning for global domination. "Our aim is to inspire the world to dress casually," he told analysts at the half-year results meeting in May, adding that he wants sales of 1 trillion yen ($9.2 billion) by 2010 and is looking for acquisitions and joint-venture partners. With luck, Yanai will keep the company's year of fear in mind as he plots his next move.

By Ian Rowley in Tokyo

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