Uniqlo: Chinese growth supports push against Inditex in Europe

The magical profit boost that global companies and investors had expected to gain from China’s reopening this year has not materialised. Chinese consumers are cutting down on spending as the economy falters. That benefits Uniqlo, which sells affordable clothing.

Global inequality is an unstoppable trend. Regrettable though that may be, it creates investment opportunities in value retailing, just as it does in luxury goods.

Uniqlo’s Japanese parent company Fast Retailing reported record earnings for the third quarter on Thursday. The group’s operating profit rose 35 per cent to ¥110.3bn ($797mn), beating expectations.

Brick-and-mortar stores, long decried as dying in mainland China, deserve the credit. Uniqlo has nearly 1,000 outlets in mainland China, more stores than in its home market. They have been generating strong sales growth. Fast Retailing has accordingly raised its full-year forecast to ¥370bn for the year to August.

But that growth also reflects the bleakness of China’s economic outlook. Consumers are losing confidence as the local economy slows. Youth unemployment has hit fresh records. Locals are spending less and saving more. That means spending only on low-cost goods. The danger is that customers may economise further by deferring clothes purchases.

Fast Retailing’s shares are up a third this year. They trade at 42 times forward earnings, double global peer Inditex. Fast retailing is the sixth-biggest Japanese stock by market value. The rally in local equities may carry it higher.

Longer term, brisk Chinese sales will not be enough to justify the stock price premium. Fast Retailing lags behind Inditex in inventory turnover and operating margins. The Spanish rival has a wider portfolio of brands and smart dynamic pricing.

Uniqlo must win over Europe and the US markets, where is yet to build a strong presence. Then it will have a chance of hitting its 10-year goal of tripling sales to Y10tn. A costly battle with Inditex lies ahead.