Fast Retailing Co., Asia’s biggest clothing retailer, cut its annual profit forecast for a second time this fiscal year after suffering losses at its J Brand premium denim unit in the United States.
The maker of Uniqlo casual apparel said net income will probably be about ¥78 billion ($768 million) for the year ending August, below its previous forecast of ¥88 billion and missing an ¥88.5 billion average estimate from 18 analysts surveyed.
Fast Retailing, which has been seeking overseas growth amid slowing domestic demand, will record a special loss of ¥10 billion for U.S.-based J Brand and may post an impairment charge for the year as the loss-making business failed to meet its target in the third quarter. J Brand, 80 percent-owned by Fast Retailing, sells its premium denim products in more than 2,000 outlets in the U.S., including department stores.
“Affordable luxury brands by and large weren’t doing well,” Chief Financial Officer Takeshi Okazaki said at a news conference in Tokyo on Thursday. “The premium market is slowing and the competition is rising, and we couldn’t handle it well. We regret it. We are going to turn it around.”
Shares of Fast Retailing fell 1.9 percent to close at ¥32,855 in Tokyo, the lowest level since May 22. That compares with a 0.3 percent decline in the Nikkei 225 Stock Average.
This is the second time Fast Retailing lowered its annual profit forecast in the current fiscal year. It cut its forecast in April to ¥88 billion from ¥92 billion set in October last year.
President Tadashi Yanai, Japan’s wealthiest man, pared the company’s profit outlook in April as its domestic business faces waning demand. Retail sales dropped 4.3 percent in April after Japan raised its consumption tax that month, easing to a 0.4 percent decline in May, according to data from Japan’s Ministry of Economy, Trade and Industry. Costs for part-time workers, distribution and warehousing has limited growth in the domestic business.
Net income fell 12 percent to ¥20.28 billion in the third quarter ended May, according to calculations derived from the company’s results. This compares with the ¥20.2 billion average estimate from three analysts surveyed. Sales rose 19 percent to ¥323.7 billion during the three-month period.
Gross profit margin at the domestic Uniqlo business improved 3.9 points to 52.6 percent in the third quarter as the company limited discounting, according to a company presentation. That compares with a 1.2 point decline a year earlier. Operating profit at the Uniqlo business in Japan rose 27 percent to ¥24.5 billion in the quarter this year.
“It’s amazing they improved the margin at the domestic Uniqlo business that much,” said Mikihiko Yamato, deputy head of research at JI Asia in Tokyo. “The special loss is just one-time, so I wouldn’t be too worried about it.”
Sales at the domestic Uniqlo business, which made up of more than half of the group’s total sales, rose 5.1 percent to ¥569.4 billion in the first nine months of the year. Revenues for the brand’s clothing outside of Japan, which contributed 30 percent to the group, climbed 71 percent to ¥327.7 billion.
Fast Retailing’s Japanese casual-wear GU brand and Uniqlo’s operations in Southeast Asia also performed below expectations, the company said Thursday. Uniqlo’s U.S. unit continues to make losses because of the cost of opening more stores, it added.
Yanai, who built Fast Retailing from the casual clothing maker and retailer he inherited from his father, plans to turn the company into the world’s largest clothing retailer and has set a target of ¥5 trillion in sales by 2020.
The executive has said he plans to open 200 to 300 outlets overseas annually, including between 20 to 30 new stores a year in the U.S, as Uniqlo embarked on an overseas expansion blitz.
Fast Retailing forecast in April Uniqlo international sales will increase 59 percent to ¥400 billion by the end of the fiscal year to August, while it expected revenues to climb 5 percent to ¥715 billion for the domestic outlets.
The number of overseas Uniqlo outlets increased by 188 to 598 stores as of end-May, of which about half are in China, the company said yesterday. It had 841 directly run domestic stores, eight more than a year earlier.
Yanai, with an estimated net worth of $17 billion, is also in the process of changing 16,000 part-timers’ contracts at Uniqlo in Japan to full time to maintain a stable workforce, potentially lifting its labor costs.