Thursday, July 18, 2024

Uniqlo can capitalise on Europe’s fast-fashion weakness

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Even as shoppers stop spending in an economic slowdown, there is one thing that always sells: low-cost clothing basics. Uniqlo has been one of the outperformers that has kept growing as consumer sentiment weakens. The Japanese owner of the brand, Fast Retailing, is now expecting its third straight year of record-high profits.

Fast Retailing upped its full-year operating profit forecast to ¥475bn ($2.9bn) for the year to August from ¥450bn previously, as earnings rose in the latest quarter. In the three months through to May, operating profit rose 31 per cent, beating market expectations.

This may come as a surprise. Earnings in Greater China, where Uniqlo has more than 1,000 stores accounting for more than 40 per cent of its global total, fell sharply in the nine months to May.

But early, extreme summer temperatures in Japan boosted demand for clothes made of ultra-stretch material. Operating profit in the company’s home market rose more than 50 per cent as its summer collection appealed to local tastes. Duty-free sales also soared as inbound tourists arrived in record numbers this year.

Another reason for Uniqlo’s strong numbers is the weak yen. Its overseas sales account for more than half its total. In the current fiscal year, revenues from North America and south-east Asia have grown. The sliding yen, which has weakened 15 per cent against the US dollar since a December low has boosted the value of these sales.

Still, Europe must be where it finds its source of lasting growth. Uniqlo has less than 80 stores in Europe. But sales per store there have reached about triple that of its shops in Japan.

Europe had once seemed a difficult market for foreign brands to crack thanks to the dominant position of Zara and H&M. But Uniqlo has started betting on the region to deliver growth, opening new flagship stores in Edinburgh and Rome this year. In its fiscal first half to February, operating income at its European unit rose 50 per cent on revenue growth of almost 40 per cent.

Shares of Fast Retailing are up 30 per cent this year, and trade at 40 times forward earnings — roughly double that of European peers H&M and Inditex, which owns Zara. The growth potential for Fast Retailing is in its rivals’ backyard. The slowdown in sales at European peers in recent months creates an opening for Uniqlo.

june.yoon@ft.com

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