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What's in a name? Fast Retailing would have you believe a lot. The Japanese company behind the Uniqlo brand – famed for its simple clothes and also the sponsor of tennis star Novak Djokovic – is expanding as though fashion is, er, going out of fashion. It is adding 200 stores in Asia every year, half of which will be in China, and plans to raise this target to 400 stores in the future. Last week, it became the first global clothes retailer to open stores in Bangladesh. Shoppers there can pick up a T-shirt for as little as 195 Bangladeshi taka ($3). But is Fast Retailing getting ahead of itself?
According to third-quarter results on Thursday, operating profits were flat at 27-billion yen ($282.4-million) – below expectations. The retailer will have to deliver a bumper fourth quarter to meet a full-year operating profit growth target of 17 per cent. That the yen has weakened by a quarter against the renminbi has not helped. Fast Retailing derives 60 per cent of sales from Japan, yet sources almost all of its clothes from China. Operating profits in Japan fell 5 per cent year over year. In addition, rapid expansion outside of Japan will hurt margins further. An overseas operating margin of 10 per cent is 6 percentage points lower than at home.
This is problematic for an important Japanese company. With a market capitalisation of 3.8-trillion yen, Fast Retailing is now the biggest constituent of the Nikkei 225 benchmark index. Ever since sentiment warmed to the country on the back of prime minister Shinzo Abe's return to office, global fund managers have adjusted their long-held underweight positions on Japanese equities. That has helped Fast Retailing's shares to double in price over the past several months. The glitch is that the retailer's shares are now expensive, trading on 40 times forward earnings – a 70 per cent premium to both Spain's Inditex (the owner of the Zara brand) and Sweden's H&M.
Fast Retailing's performance cannot be tied to the Nikkei forever. Indeed, its shares fell 6 per cent on Friday following the results while the broader Japanese market stayed flat. That suggests the shares are looking vulnerable, especially at such a hefty price.