Fast Retailing: rags to riches
Despite their high valuation, the Japanese group’s shares have room to run
If selling clothes was an indicator of success for Japan’s push to raise inflation, then Prime Minister Shinzo Abe should be pleased with Fast Retailing. The Japanese group, owner of the Uniqlo brand, posted a 10 per cent year-on-year boost to quarterly revenue. More importantly, the dependency upon domestic sales is ending. Despite a high valuation, the stock has room to run.
Clearly, the market sees something new. Fast’s share price has gained 65 per cent from September lows. Before the rally, disappointing performance in Japan was blamed on a warm winter followed by a cool summer. In the meantime, foreign sales were booming. First-quarter results released on Thursday revealed sales of ¥258bn ($2.3bn) from Uniqlo’s international operations. These exceed Japan’s for the first time.
Even better, December same-store sales in Japan increased 18 per cent compared with the year before. The group relies primarily on physical store sales, contradicting narratives of doom from online sales.
Fast Retailing shares are pricey. At Thursday’s close, the group’s market value amounted to 37 times its forward earnings. That is in line with its own five-year average. But local apparel sellers trade a third lower on average. Global peers, such as Spain’s Inditex, are cheaper still.
Yet the group has one of Japan’s few global apparel brands. And earnings per share, which have travelled sideways since 2013, should begin to grow again from this year. First-quarter operating margins increased 1.7 percentage points to 18.3 per cent compared with the corresponding quarter last year. Moreover, analysts at Goldman Sachs see potential for a further boost: currency contracts, used to hedge upcoming import costs, appear to be struck at more advantageous levels than in the past year. That could decrease the cost of sales
The group’s high earnings multiple would contract if its global expansion strategy trips. That is not likely. With margins high, the stock should head the same way.