The Wall Street Journal-20080206-Fast Retailing Wins Nods From Investors- Consumers

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Fast Retailing Wins Nods From Investors, Consumers

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TOKYO -- Six months ago, Fast Retailing Co. was on the outs with investors. Now, its line of high-tech thermal underwear is an unexpected hit with fashionistas, and the clothing retailer is part of a small group of Japanese companies whose share price has bucked a slumping stock market.

Many analysts say its shares should keep climbing because its ethos of cheap basics appeals to Japanese consumers at a time when spending on clothing is falling. But one challenge it faces is coming up with trendy items to sell during Japan's sweltering summers.

For now, cashmere sweaters that sell for as little as 2,000 yen, or about $19, are flying off the shelves at Fast Retailing's 758 Uniqlo casual-clothing stores across Japan.

Another hit is its Heat Tech thermal underwear, which claims to generate and trap heat from sweat vapors. It sells for about 1,000 yen. The company says Uniqlo stores have virtually sold out its winter stock of 20 million units of the snug lingerie, which it co-developed with synthetics-fabrics maker Toray Industries.

As a result, same-store sales in Japan, which were disappointing over the summer, rose monthly for the final three months of 2007.

The company has said it intends to expand in part through acquisitions, something that has made investors nervous in the past. Fast Retailing, which is a component of the Nikkei Stock Average of 225 companies, booked its first quarterly operating profit for stores outside Japan, where it has been moving into markets such as the U.S., United Kingdom and China since 2001. Overall, net profit grew 8.7% in the quarter ended in November to 15.4 billion yen.

"Uniqlo was perhaps the sole winner among apparel companies here" over the holiday season, says Masafumi Shoda, an analyst at Nomura Securities.

Mr. Shoda rates the stock a "2," which means it is likely to outperform the broader market by 5% to 15% over the next six months. He declined to set a specific target price.

Investors have responded to the company's strong sales. Fast Retailing's share price climbed 16% in the three months through Jan. 30, while the Nikkei fell 20%. Tuesday, Fast's shares closed at 7,830 yen, up 240 yen or 3.2%.

One risk for investors is the Japanese economy. The domestic market accounts for 91% of Fast Retailing's operating profit, and the economy is showing signs of stalling. Nationwide household expenditure on clothing fell 5.8% in December from a year earlier, despite an overall rise in spending.

Fast Retailing bucked that trend with a 6.4% increase in same-store sales. But it also needs to come up with new products to keep sales up through the year. Uniqlo's cheerful stores carry cheap basics like sweaters and fleece jackets in an array of colors. In recent years, the retailer has tried to sport a trendier look with a series of T- shirts designed by some of Japan's top artists.

The recent performance by the clothing purveyor, based in Yamaguchi, in western Japan, shows a big difference from just several months ago. In August, its bid for U.S. luxury retailer Barneys was topped by Dubai-based investment firm Istithmar. Then Fast Retailing announced disappointing summer sales. The stock fell to 6,010 yen in mid- September.

Analysts credit Fast Retailing's comeback to several factors. It revamped operations to respond more quickly to swings in weather and fashion trends, copying measures taken by Sweden's Hennes & Mauritz and Spain's Inditex, which owns the Zara chain. It cut back on inventories, which meant less discounting during the holiday sales season. And sales have also been brisk in overseas markets.

"Uniqlo is close to top form" in China, Hong Kong and South Korea, where it operates a total of 30 stores, says Dairo Murata, a Tokyo- based analyst at Credit Suisse. But establishing the Uniqlo brand in the U.S. and Europe will be more difficult amid stiff competition from H&M and Zara. Fast Retailing has closed many of the 21 Uniqlo stores it opened in the U.K.

The company has since changed its strategy. Its flashy flagship store in New York's SoHo district is more about "winning recognition as a global brand" than immediate profit, Mr. Murata says.