Uniqlo owner sees big profit drop in China due to Covid restrictions
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The owner of Japanese clothing brand Uniqlo on Thursday flagged a big profit drop in China due to COVID-19 restrictions, while its chief executive sounded alarm about the weakening yen’s potential to drive up costs.
Fast Retailing is a rare bellwether for both global retailers in China, its biggest foreign market, and consumer demand in Japan, where it has carved out a dominant position by offering casual clothing to famously price-conscious shoppers.
It and other multi-national retailers are now being forced to deal with lockdown measures in China. Fast Retailing has 863 stores on the mainland and almost 90 outlets in Shanghai, where strict measures, introduced in late March, remain in place to contain the country’s worst outbreak of the pandemic.
McDonald’s and Starbucks, which each have dozens of outlets in Shanghai, have also been impacted as has production for retailers such as H&M, and Nike.
Fast Retailing said it expects revenue declines and a large drop in profit in its Greater China segment in the second half and for the whole of fiscal 2022 due to COVID restrictions.
Sales in the Greater China region, which includes Hong Kong and Taiwan, were hit in March, as up to 133 stores were temporarily shut.
It has more Uniqlo stores in China than in Japan. It opened a flagship store in Beijing in November, and plans to open in 100 locations in the country each year.
Separately, luxury brand Hermes said it had a strong start of the year in China until the beginning of March and is confident stores closed in Shanghai will reopen quickly.
“There’s absolutely no merit to a weak yen,”
But the weakening yen and higher costs have forced Fast Retailing to consider price rises, a major shift for a company that has long competed on price.
“There’s absolutely no merit to a weak yen,” Chief Executive Tadashi Yanai told reporters.
“Japan is engaged in the business of importing raw materials from all over the world, processing them, adding value to them, and selling them. In this context, there is no advantage if the value of a country’s currency weakens.”
The yen has been hammered this year, falling to the weakest level in almost 20 years against the dollar. For many Japanese companies that manufacture offshore – like Fast Retailing – the weak yen is less of a benefit than for traditional exporters.
The company reported a record half-year profit on Thursday, buoyed by sales growth in North America, Europe, and other parts of Asia, while revenue and profit declined in Japan and China.
Operating profit climbed 18% to 189 billion yen ($1.51 billion) in the six months through February from a year earlier.
The company maintained its full-year profit forecast at 270 billion yen. That compares with a consensus forecast for annual profit to total 278 billion yen, according to a Refinitiv poll of 11 analysts.
The Ukraine crisis has created another headwind, leading the company to close its 50 stores in Russia, after it initially resisted calls to exit the market along with other major brands.
Prior to the earnings release, shares in Fast Retailing closed up 2.1%, versus a 1.2% gain in the broader market.
Questions & Answers
Q.Which specific areas within China have been most affected by the COVID-19 restrictions for Fast Retailing?
Which specific areas within China have been most affected by the COVID-19 restrictions for Fast Retailing?
Fast Retailing's operations have been significantly impacted in Shanghai, where strict measures were introduced in late March. Sales were also hit across the broader Greater China region, including Hong Kong and Taiwan, in March.
Q.How does the weakening yen specifically impact Fast Retailing's business model?
How does the weakening yen specifically impact Fast Retailing's business model?
The weakening yen is a concern for Fast Retailing because Japan imports raw materials, processes them, and then sells finished goods. A weaker yen drives up the cost of these imported raw materials, forcing the company to consider price rises.
Q.Despite the issues in China and Japan, what factors contributed to Fast Retailing's record half-year profit?
Despite the issues in China and Japan, what factors contributed to Fast Retailing's record half-year profit?
The company's record half-year profit was buoyed by strong sales growth in North America, Europe, and other parts of Asia. This performance helped offset declines experienced in its Japanese and Chinese markets.
Q.How does Fast Retailing's maintained full-year profit forecast compare to analyst expectations?
How does Fast Retailing's maintained full-year profit forecast compare to analyst expectations?
Fast Retailing maintained its full-year profit forecast at 270 billion yen. This figure is slightly below the consensus forecast of 278 billion yen from a Refinitiv poll of 11 analysts.
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