Unseasonal weather and Korea's boycott depressed profits; we deem the negatives short-term one-offs

Narrow-moat Fast Retailing’s first-quarter profits, down more than 12%, came in below our expectation and the company’s target as unseasonal weather depressed demand for warm clothes while multiple overseas headwinds dragged on overseas Uniqlo growth. Given a sizable shortfall of the first quarter and continued boycott in Korea, we have lowered our earnings forecasts mainly for 2020 and 2021 by a marginal 2%. Our earnings forecast for 2020 is 12% above the guidance. We reckon that the boycott in Korea and warm weather are one-off negatives which do not affect the company’s long-term growth prospect and its moats of intangible assets as well as a cost advantage. We have maintained our fair value estimate of JPY 50,000 given marginal impacts of earnings adjustment but continue to view shares overvalued with a 20% downside. We prefer to own the name when it offers a sufficient margin of safety.