Company Reports

Wide-moat Fast Retailing reported revenue and operating income up 14% and 31% year over year, respectively, for the quarter ended May, tracking ahead of our estimates. We increased our revenue forecast by 2% and operating income by 4% for fiscal 2024 (ending August 2024). This leads to a fair value estimate increase of 1% to JPY 45,400 per share. The shares are fairly valued. Strong results were driven by the operations in North America, Europe, Southeast Asia, and Japan, but mainland China revenue and profit contracted in local currency terms in the quarter. We expect to see revenue growth in fiscal 2025 in CNY terms, however, as management adopts a new strategy. If the Japanese yen appreciates in the near term due to a narrowing interest-rate differential between Japan and overseas, we could see pressure on Fast Retailing’s revenue, with the financial impact offset by a lower cost of sales for overseas production.

Uniqlo, the dailywear brand known for its product quality and functional materials at affordable prices, is Fast Retailing’s core business. Uniqlo’s brand concept embraces global consumers of a wide age range, enabling economies of scale and strategic partnerships with leading textile suppliers. Uniqlo International was the largest segment, representing 60% of Fast Retailing’s EBIT in fiscal 2023.

We initiate wide-moat Fast Retailing with a fair value estimate of JPY 44,900 per share, which translates to a fiscal 2025 P/E of 39 times. Our weighted average cost of capital is 6.1%. We think the shares are fairly valued.

Uniqlo, the dailywear brand known for its product quality and functional materials at affordable prices, is Fast Retailing’s core business. Uniqlo’s brand concept embraces global consumers of a wide age range, enabling economies of scale and strategic partnerships with leading textile suppliers. Uniqlo International was the largest segment, representing 60% of Fast Retailing’s EBIT in fiscal 2023.

We are dropping coverage of Fast Retailing. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Fast Retailing's second-quarter result was largely within our expectations. Management's revenue guidance was adjusted higher to factor in the stronger first half, but bottom-line guidance is unchanged given expected pricing pressure. Our forecasts already factored in the more optimistic guidance. Our fair value estimate of JPY 66,000 per share is unchanged. While the share price has declined to 20% from its peak in late February, we continue to see the narrow moat-rated company as overvalued.

Uniqlo, the daily wear brand known for its good quality and functional material at affordable prices, is the growth engine of Fast Retailing’s portfolio. Uniqlo’s brand concept of basic life wear embraces consumers within a wide age range, enabling economies of scale to lower costs and strategic partnership with leading textile manufacturers to develop proprietary materials. The brand is making deep inroads into overseas markets, attempting to replicate its success in Japan, where it has obtained close to 10% market share of the local apparel market. In contrast, the fast-fashion brand GU has a competitive edge in supply chain efficiency and responsiveness to changing trends.

Narrow-moat Fast Retailing reported solid first-quarter (three months ending November 2020) results featuring minimal revenue dip (less than 1%) while operating profit grew 23% year over year. Despite delivering stronger than expected first-quarter numbers, management has maintained its fiscal 2021 guidance, presumably because it does not expect the current strong pricing trends to continue. Despite facing strong competition, Uniqlo’s performance in Mainland China continues to remain robust, and for this reason, we lift our revenue growth assumption for the region. As a result, our fair value estimate is increased to JPY 66,000 from JPY 53,000. According to consensus data from Pitchbook, the firm is trading at 52 times forward earnings on just mid-single-digit percentage long-term earnings growth. We believe the past year's 40% rally in share price was driven predominantly by rising sentiment, instead of business fundamentals. While we are convinced that Uniqlo's cost advantage and intangible assets will sustain group growth, fueled by the potential in Asia, we view Fast Retailing's shares as overvalued, trading at a 40% premium to our fair value estimate, in part because of its low free float and its sizable weight in the Nikkei Index.

Uniqlo, the daily wear brand known for its good quality and functional material at affordable prices, is the growth engine of Fast Retailing’s portfolio. Uniqlo’s brand concept of basic life wear embraces consumers within a wide age range, enabling economies of scale to lower costs and strategic partnership with leading textile manufacturers to develop proprietary materials. The brand is making deep inroads into overseas markets, attempting to replicate its success in Japan, where it has obtained a 9% market share of the local apparel market. In contrast, the fast-fashion brand GU has a competitive edge in supply chain efficiency and responsiveness to changing trends.

Narrow-moat Fast Retailing reported fourth-quarter results beating its own guidance issued back in July. We lift our fair value estimate to JPY 53,000 from JPY 48,000, mainly to reflect a modest lift in sales forecast resulting from stronger overseas expansion. While we are convinced that Uniqlo's cost advantage and intangible assets will sustain group growth, fueled by the potential in Asia, we view Fast Retailing's shares as overvalued, trading at a 40% premium to our fair value estimate, in part because of its low free float and its sizable weight in the Nikkei Index. We would prefer to own the name when it offers a wider margin of safety.

Uniqlo, the daily wear brand known for its good quality and functional material at affordable prices, is the growth engine of Fast Retailing’s portfolio. Uniqlo’s brand concept of basic life wear embraces consumers within a wide age range, enabling economies of scale to lower costs and strategic partnership with leading textile manufacturers to develop proprietary materials. The brand is making deep inroads into overseas markets, attempting to replicate its success in Japan, where it has obtained a 9% market share of the local apparel market. In contrast, the fast-fashion brand GU has a competitive edge in supply chain efficiency and responsiveness to changing trends.

Uniqlo, the daily wear brand known for its good quality and functional material at affordable prices, is the growth engine of Fast Retailing’s portfolio. Uniqlo’s brand concept of basic life wear embraces consumers within a wide age range, enabling economies of scale to lower costs and strategic partnership with leading textile manufacturers to develop proprietary materials. The brand is making deep inroads into overseas markets, attempting to replicate its success in Japan, where it has obtained a 9% market share of the local apparel market. In contrast, the fast-fashion brand GU has a competitive edge in supply chain efficiency and responsiveness to changing trends.

The coronavirus pandemic significantly impacted narrow-moat Fast Retailing's end-May third-quarter results as most of its stores across the world were forced to close or open for shorter hours. Its 39% sales drop in the quarter was higher than our expectations while reporting a net loss of JPY 9.8 billion versus a JPY 72.9 billion net profit booked in the same period last year. Management also lowered its fiscal 2020 revenue and operating profit guidance by 5% and 10% respectively, on slower-than-expected store reopenings. We align our fiscal 2020 forecast with the new guidance by slightly reducing top- and bottom-line projections. Since the downward adjustments are isolated to fiscal 2020, our fair value estimate remains unchanged at JPY 48,000. Shares of Fast Retailing appear slightly overvalued.

Uniqlo, the daily wear brand known for its good quality and functional material at affordable prices, is the growth engine of Fast Retailing’s portfolio. Uniqlo’s brand concept of basic life wear embraces consumers within a wide age range, enabling economies of scale to lower costs and strategic partnership with leading textile manufacturers to develop proprietary materials. The brand is making deep inroads into overseas markets, attempting to replicate its success in Japan, where it has obtained a 9% market share of the local apparel market. In contrast, the fast-fashion brand GU has a competitive edge in supply chain efficiency and responsiveness to changing trends.

Uniqlo, the daily wear brand known for its good quality and functional material at affordable prices, is the growth engine of Fast Retailing’s portfolio. Uniqlo’s brand concept of basic life wear embraces consumers within a wide age range, enabling economies of scale to lower costs and strategic partnership with leading textile manufacturers to develop proprietary materials. The brand is making deep inroads into overseas markets, attempting to replicate its success in Japan, where it has obtained a 9% market share of the local apparel market. In contrast, the fast-fashion brand GU has a competitive edge in supply chain efficiency and responsiveness to changing trends.

Narrow-moat Fast Retailing lowered its fiscal 2020 revenue and profit guidance by 11% and 39% as the coronavirus forces more stores to close. Because we are no better than management when it comes to predicting how the coronavirus plays out in the near term, we align our forecast with the firm's revised guidance. Since downward adjustments are isolated to fiscal 2020, our fair value estimate is only slightly reduced to JPY 48,000 from JPY 49,000. We maintain our view that the coronavirus poses minimal long-term impact to Fast Retailing's business and remain optimistic about the company's long-term outlook.

Uniqlo, the daily wear brand known for its good quality and functional material at affordable prices, is the growth engine of Fast Retailing’s portfolio. Uniqlo’s brand concept of basic life wear embraces consumers within a wide age range, enabling economies of scale to lower costs and strategic partnership with leading textile manufacturers to develop proprietary materials. The brand is making deep inroads into overseas markets, attempting to replicate its success in Japan, where it has obtained a 9% market share of the local apparel market. In contrast, the fast-fashion brand GU has a competitive edge in supply chain efficiency and responsiveness to changing trends.

We are lowering our earnings and fair value estimate for Fast Retailing to account for the damage the coronavirus has done in Asia and the potential damage it will do to the firm's sales in the United States and Europe. The change in near-term forecasts lead to a 4% and 13% cut in the fiscal 2020 revenue and earnings forecast respectively. Our fair value estimate is slightly reduced to JPY 49,000 from JPY 50,000, based on the expectation of a fast recovery in China. Given its solid balance sheet, we do not expect Fast Retailing to run into liquidity issues. The group's stock has sold off and is currently trading almost 20% below our fair value estimate.

Uniqlo, the daily wear brand known for its good quality and functional material at affordable prices, is the growth engine of Fast Retailing’s portfolio. Uniqlo’s brand concept of basic life wear embraces consumers within a wide age range, enabling economies of scale to lower costs and strategic partnership with leading textile manufacturers to develop proprietary materials. The brand is making deep inroads into overseas markets, attempting to replicate its success in Japan, where it has obtained a 9% market share of the local apparel market. In contrast, the fast-fashion brand GU has a competitive edge in supply chain efficiency and responsiveness to changing trends.

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.