Fast Retailing the multi-national

A new listing on the Hong Kong stock exchange is part of Fast Retailing’s wider strategy to globalise its operations in a bid to get its stores into every key international market. Non-Japanese sales are certainly rising fast on the back of a rapid store roll out, but profitability remains elusive in some markets and may impinge on its appeal to those new international investors in Hong Kong.

Fast Retailing plans a second listing on the Hong Kong stock exchange in March. It will list depository receipts there, with Tokyo remaining its primary exchange. The aim of the new listing is to raise its profile in Asia, increase investment from overseas funds and internationalise its financial management.

The move reflects the Uniqlo operator’s growing internationalisation. In 1Q2014, Uniqlo saw more than 35% of sales come from overseas stores. Although overseas sales are forecast to only account for 33% of sales for the year ending August 2014, this is up from just 27% last year, and the ratio could well be even higher.

Uniqlo plans to only open a net six stores in Japan this year, although this includes replacement of smaller stores with larger ones.  The rate of expansion is tiny relative to overseas where it plans 200 new stores and is making loud noises about opening 400 stores in the next two to three years, including 20 to 30 a year in the US. Last year overseas operations accounted for 34% of store numbers and during the year it opened 102 new stores in China, Taiwan and Hong Kong out of a total of 154 overseas.

All of which sounds fine, but at the moment overseas operations are a drag on Fast Retailing’s profitability. Although the domestic stores delivered an operating margin of 16.3% last year and a forecast 15.9% this year, overseas stores are expected to come in at 8%, pulling down the average to 13.3%. Granted it is still early days in some markets, especially for those unwieldy European flagships and redlining US stores – but by contrast in 4Q 2013, another fast expanding international fashion retailer, H&M, delivered an operating margin of 19.9% on global operations.

Uniqlo actually tops domestic rankings with the highest operating margins of any apparel retailer other than Workman, but its plans to further internationalise its investor base through the Hong Kong listing will mean its return on capital will be scrutinised that much more closely against global competitors. Though Fast Retailing is nothing if not persistent and will work hard to raise profitability overseas, its recently announced plans to create separate product lines to suit markets like the US run counter to the MO of competitors like H&M and Inditex, and suggest lower economies of scale – even if it does strengthen product appeal.