Japan’s Fast Retailing eyes shopping spree; Uniqlo chain has spent roughly Y100bn ($980m) on mergers and acquisitions over the past decade

May 11, 2014 4:37 am

Japan’s Fast Retailing eyes shopping spree

By Jennifer Thompson in Tokyo

Tadashi Yanai, founder of the Fast Retailing group, likes to shop.

Japan’s Fast Retailing, which began life in 1984 selling cheap and cheerful clothes through its Uniqlo chain, has spent roughly Y100bn ($980m) on mergers and acquisitions over the past decade.

In so doing, it has added a raft of more upscale brands, including two French labels, Princesse Tam Tam and Comptoir des Cotonniers, acquired in 2006. Three years later it took full-control of Theory, and in 2012 bought J Brand, a US denim wear label that is its most high-profile takeover to date.

More recently it has flirted with US chain J Crew, a favourite of Michelle Obama but has dismissed as speculation reports of an interest in flowery UK brand Cath Kidston.

Organic growth has played a big part to date, as the group has blossomed from single-store family business in southern Japan, to one opening some seven stores a week over the coming months. Its domestic business so far also appears to have come through Japan’s recent sales tax increase unscathed: in April, the first month of the rise, year-on-year sales for its Uniqlo stores in the country grew 7 per cent.

But, say analysts, M&A is vital if it is to meet its bold targets of Y5tn in sales and net profit of Y1tn – numbers that would catapult it past peers such as Inditex, Gap and Hennes & Mauritz.

“If you really want to get this target by 2020, M&A should be one of the key components,” says Takahiro Kazahaya, analyst at Deutsche Bank. Fast Retailing has not set a firm timeframe, but has previously mentioned 2020.

The group’s full-year sales to August last year were Y1.1tn ($11.6bn) with net income of Y90.3bn. That lags Inditex with sales of €16.7bn ($23bn) in the year to January 2014, as well as Gap and H&M at $16.2bn and SKr128.6bn ($19.9bn) respectively.

Fast Retailing’s projections also imply aggressive net margins of 20 per cent. This compares with Inditex, which runs Zara stores and is considered one of the best-performing retailers, which last year reported net margins of 14.2 per cent.

The company – whose shares comprise 9 per cent of Japan’s Nikkei 225 index – harbours the will and firepower to again seek out targets. “M&A opportunities will likely increase in importance as we expand our global reach,” read its 2013 annual report. The group had Y358.6bn in cash and liquid assets as of the end of February.

It also recently listed depositary receipts in Hong Kong. Although the HDRs were not used to raise new cash, the company has not ruled out doing so in the future.

Fast Retailing’s record on acquisitions to date is mixed.

Theory is the star in the Fast Retailing family, growing rapidly in both stores and sales. Revenues of Y70bn in the year to August 2013 was up from Y60bn the previous year. Another 38 stores were added in that period on a net basis, and the group plans to open another 46 by August this year.

Fast Retailing’s ambitions are for sales to reach Y100bn by expanding the chain across Europe and Asia.

However, Princesse Tam Tam and Comptoir des Cotonniers are faring less well. Both were cited as areas where the group wanted to boost performance in its annual report last year, and several stores have been shut over the past 18 months.

It is also quick to unstitch deals that have not worked.

In 2004, Fast Retailing acquired the brand National Standard, but in 2006 liquidated the women’s wear label, saying that the group was expanding too slowly in spite of “considerable effort.” Cabin, a Japanese women’s wear chain acquired in 2010, also struggled and was merged three years later with Theory.

Fast Retailing cited the “changing lifestyles and tastes of the young female consumers that Cabin targets as its main customers”, for the decision, which led to an exceptional loss of Y3bn in 2010.

“[They have] really strict requirements,” for both buying and keeping brands says Dairo Murata, senior analyst, at JPMorgan Securities.

To this end, Fast Retailing’s targets have been successful lines rather than turnrounds – and this strategy is likely to remain, Mr Murata adds.

Theory, for example, appealed to Fast Retailing as its management team, headed by co-founder Andrew Rosen, was well-respected within the industry and had extensive knowledge of the US market.

Fast Retailing is always quietly looking for takeover candidates, says Mr Murata, who adds that it is likely to be periodically approached by clothing retailers hoping for a new owner, but that it only wants to acquire successful companies.

“They are very, very picky,” he adds.