United Arrows: under pressure

United Arrows posted higher sales in FY2014, but it is suffering from falling profits and its core chains are experiencing declining footfall, down 10% last year on a same store basis. Management admits to problems with merchandise, but there is a growing concern that the brand is also losing its cachet after several years of experimental brand extensions and odd store locations.

United Arrows Same Store Sales

Although United Arrows posted sales up 2% for FY2014 to ¥131 billion, operating profit fell just under 17% to ¥11.3 billion and net profit was down 20%. During the year it opened a net 11 new stores bringing the total to 242, including 21 outlet stores. Despite the increase in store numbers sales actually fell 1.2% at the parent company (which accounts for 90% of consolidated sales). This is troubling given the overall buoyancy in the market.

There was some good news from improved merchandising of own brands, as well as the successful introduction of new international labels. United Arrows also saw better upsell to customers, as well as making more effective use of social media. It cited its more active in-store promotions as examples of improvements. Online sales also helped, rising 9.8% on a non-consolidated basis, and now making up 12% of all retail sales.

All of which is meritorious, but no amount of sales training and social media will help when store traffic itself evaporates – footfall fell a huge 10% in FY2014 on a same store basis. The select shop leader said that it felt it had introduced new levels of excitement to its line up, but consumers clearly didn’t respond as much as hoped. As a result of lower footfall, same store (excluding online) sales fell 3.4% during the year, and during 4Q fell nearly 9%.

While United Arrows has compensated for the fall in traffic through upsell to actual customers, the dramatic loss of footfall is worrying. Granted, the strong spending in February and March 2014 also skews the numbers, but the drop in footfall of nearly 15% in February and 18% in March 2015 looks like more than an adjustment, particularly when in many other months footfall was down more than 10%.

By chain, United Arrows itself saw same store sales fall 4%, followed by Green Label Relaxing down 0.7%. Smaller chains were down nearly 11% and only Chrome Hearts improved, up 3.9%.

These figures suggest real problems. One significant issue was poor merchandising during Autumn/Winter at the core United Arrows select shops but there are also signs that the United Arrows’ formula of select shop retailing may have reached its peak. The recent plethora of licensing and joint venture deals to extend the United Arrows brand across a diverse range of products from furniture to stationery and even housing, suggests a management seeking to exploit latent value rather than create new value.

Some analysts are also concerned that these brand extensions combined with the rollout of stores under the United Arrows banner in unusual locations such as highway service areas (the highway stores have now been closed) is diluting the value of the brand, just at a time when the core customer is beginning to age and look at other sources of fashion, even resurgent department stores. There is also some curious branding such as the clumsy naming of its latest concept, ‘Monkey Time Beauty & Youth United Arrows’, a stand alone store in Harajuku for one of the private brands in Beauty & Youth.

Although it has withdrawn its medium term sales target of ¥155 billion through FY2017, United Arrows remains optimistic. For FY2015, it is forecasting sales of ¥141.4 billion, up 7.9% and operating profit flat at ¥11.6 billion. Same store sales are forecast to rise 3.3%.

Despite the problems it plans to open another 13 United Arrows stores in FY2015, up from seven last year, as well as eight for Beauty & Youth. Its mass market Coen subsidiary at least is showing signs of life at last, with sales rising 26% last year to ¥9 billion. To boost sales United Arrows says it will bolster collaboration between product planning, sales and marketing.