Uniqlo owner's luxury premium merits a rethink

RYOHIN KEIKAKU

30/08/2019 02:55

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Sharon Lam
    HONG KONG, Aug 30 (Reuters Breakingviews) - Fast Retailing’s
 9983.T  luxury premium merits a rethink. A diplomatic row over
recent weeks has prompted South Korean consumers to boycott
Japanese goods, including the group’s Uniqlo stores. It’s the
latest overseas snag for boss Tadashi Yanai, who needs foreign
shoppers to counter flat domestic sales. Setbacks like this
leave his company’s valuation, racing ahead of Zara owner
Inditex  ITX.MC , looking hard to justify.
    The country’s largest clothing chain has struggled at home,
along with Japanese consumers. Last month, Uniqlo Japan
reported a dip in sales for the nine months to May; operating
profit fell by a fifth. To offset that, the purveyor of down
jackets has been steadily ramping up abroad. Revenue at Uniqlo's
international division now surpasses and outpaces that of its
domestic unit, driven by growth markets like China. Its fancier
tags, like J Brand jeans, have helped.
    The push hasn’t gone smoothly: Fast Retailing was forced to
scale back its U.S. expansion after false starts. Its new drive
to compete with Zara and Gap  GPS.N  on their home turf had been
doing better. Korea, though, makes up around 8% of Uniqlo
revenue, meaning any pullback will hurt. Such disruptions have
come and gone before, but it’s a painful a reminder of just how
much Yanai needs outside bargain-hunters.
    Indeed, they are behind the company’s hefty valuation: it
trades at 33 times forward earnings, ahead of Spanish Inditex,
which trades at 22 times, and Sweden’s H&M  HMb.ST , at 23
times. Bank of Japan’s asset purchases have helped shares. But
it is outperforming even local rivals like Muji parent Ryohin
Keikaku  7453.T , trading at 15 times.
    A Jefferies sum-of-the-parts analysis suggests that
investors are valuing Fast Retailing's international business
alone at more than 56 times earnings – even if parts of that
business are slowing, beyond Seoul. Losses have increased in
Europe and the U.S. operation remains in the red.
    Questions around succession at the storied firm add a layer
of uncertainty. Septuagenarian founder Yanai appointed his two
sons to the board last year, but he has stopped short of saying
who will take over at the helm, and when. Clarity there would at
least help justify some extravagance.
    On Twitter https://twitter.com/sharonlamhk
    
    CONTEXT NEWS
    - Fast Retailing on Aug. 9 said that a boycott of Japanese
goods in South Korea over a diplomatic row had an impact on its
Uniqlo sales in the country. The Korean Herald reported on Aug.
2 that Uniqlo sales fell by 40% in South Korea, citing industry
sources. 
    - In July, Uniqlo Japan reported declines in both revenue
and operating profit in the nine months to the end of May.
Revenue fell 0.5% year-on-year to 701 billion yen ($6.6 billion)
while operating profit fell 19.5% year-on-year to 96.7 billion
yen. Net profit at the parent group, Fast Retailing, grew 7% in
the same period to 158.6 billion yen ($1.49 billion).  
    - The company aims to have Greater China sales of one
trillion yen by 2022.
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South Korea boycott hitting sales of Japan's Uniqlo, company
says     urn:newsml:reuters.com:*:nL4N255181
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 (Editing by Clara Ferreira Marques and Katrina Hamlin)
 ((sharon.lam@thomsonreuters.com; Reuters Messaging:
sharon.lam.thomsonreuters.com@reuters.net))