ANALYSISNew York – Fast Retailing Co Ltd (9983.T) on Thursday booked record profit for a third consecutive year on strong sales at its Uniqlo stores in China, and forecast further growth in the current year albeit dented by a boycott of Japanese goods in South Korea.
Operating profit climbed 9 percent to 257.6 billion yen (2.40 billion dollars) in the year ended August, 31, mostly in line with market expectations and helped by strong performance of its lower-priced brand GU, recalls Reuters.
Analysts on average expected operating profit of 258.6 billion yen (2.41 billion dollars) for the year ended August, up 9.5 percent from a year prior, Thomson Reuters data showed. They see a 14 percent rise in the current year, helped by strength in China and new markets.
In fact, while it projected growth in the current business year, the 6.7 percent rise to 275.0 billion yen was less than half the 15 percent growth forecast by analysts polled by Refinitiv. The company said it expected a sharp decline in South Korean sales amid a boycott brought about by a diplomatic dispute.
Period of “slow growth” ahead for Fast Retailing
Japan’s Fast Retailing could see a “period of slow growth” despite recently announcing record profits, according to one analyst that spoke to CNBC on Friday. “It’s a great, great name, great brand but there’s a lot of uncertainty,” Peter Boardman, managing director at NWQ Investment Management, told CNBC’s “Squawk Box” on Friday. “Things are slowing down.”
The Japanese retailer’s profit forecast missed expectations. Fast Retailing projected operating profits would grow 6.7 percent in fiscal 2020, well below the 15 percent growth analysts polled by Refinitiv had estimated.
In this regard, recent data have pointed to a slowing Chinese economy after years of rapid growth, with concerns that the worst may not be over. “Remember, 35 percent of their profits come out of China. So any sort of slowdown in China is certainly negatively affecting Fast Retailing or Uniqlo,” Boardman said. China has been a major growth market for Fast Retailing. Earlier this year, the retailer said it expects sales from the greater China region to hit 1 trillion yen (about 9.26 billion dollars) by fiscal 2022. That would be nearly double the 502.5 billion yen (roughly 4.65 billion dollars) in sales the company reported for fiscal 2019.
Going forward, Boardman said the pace of new store openings will be “a lot slower” than before, but added that it was “just a sign of a maturing company.”
Impact of South Korean boycotts not to be forgotten
Fast Retailing also faces challenges stemming from Tokyo’s ongoing trade dispute with Seoul, which has resulted in South Korean consumers boycotting Japanese products. That’s a risk that Fast Retailing Chief Executive Tadashi Yanai highlighted as “serious.”
In fiscal 2019, the company said its South Korea business reported a decline in both revenue and profit. Fast Retailing also forecasts “large declines” in the country for fiscal 2020. NWQ’s Boardman said South Korea accounts for about 3 percent of Fast Retailing’s revenues, a figure that was “not material” but at the same time a “significant amount of money.”
On a similar note, some analysts covering the stock have been marking down forecasts since Uniqlo and other Japanese businesses were targeted by South Korean boycotts amid a diplomatic spat. On this note, it’s worth recalling that Fast Retailing opened its first store in India last week and is also expanding in markets such as Malaysia and Indonesia.
Sales in South Korea, which account for around 8 percent of sales in Fast Retailing’s flagship Uniqlo business, fell 40 percent year-on-year in July and more in August, the Nikkei reported.
A South Korean boycott of Japanese goods is seen dragging down sales at Fast Retailing Co Ltd’s (9983.T) Uniqlo stores, denting otherwise strong financial results, analysts said. Indeed, J.P. Morgan’s Dairo Murata recently lowered his Fast Retailing earnings forecast for the current year by 4.6 percent and cut his price target on the shares to 68,000 yen from 70,000 yen.
Silver lining: India, GU and e-commerce
But Boardman also had some positive remark; he said there’s growth opportunity in the firm’s efforts both online and in India. “Currently about 12 percent of revenues are online, they want to grow that to 30 percent,” he said. “That certainly is a great opportunity but it’s a slow opportunity and probably won’t grow as quickly.” “It’s really tough for a lot of retailers to go online,” Boardman said, as a lot of it is around “branding” and the ability for firms to compete against online retail giants like Amazon and Rakuten.
The company also recently opened its first store in India, a country that Boardman said is a “great opportunity.”
From a stock valuation perspective, Fast Retailing (9983.T) surged in Tokyo trading after reporting record profit for the third straight fiscal year. The shares last traded at around 61,300 yen, up 15 percent in the year to date.
Another strong point in the just-ended year was Uniqlo’s sister brand GU, where operating profit jumped 139 percent to 28 billion yen. The brand was previously dismissed by some analysts as too similar to Uniqlo, but has proven popular for its more affordable and trendy items.
Image: Ultra Light Down Collection, Winter 2019, Uniqlo, official website
* This article was originally published here
