Japan Retail trade 12 January 2017

Fast Retailing (9983)

Uniqlo international ops brisk; 1Q op profit beat target
 Uniqlo international fared well even amid yen strength Jun Kawahara
(81) 3 5555-7092
 Sharper-than-expected profit growth in China, Southeast Asia/Oceania jun.kawahara@daiwa.co.jp

 For Uniqlo Japan, op profit apparently weaker than expected

What's new: Fast Retailing announced results for 1Q FY17 (year ending
Aug 2017) and held an analyst meeting on 12 January.
1Q FY15 1Q 16 1Q 17 Y/y % 17 E 17 CE 17 CP
Revenue (Y mn) 479,543 520,303 528,847 1.6 1,863,400 1,875,070 1,850,000
Operating profit (Y mn) 91,370 75,921 88,591 16.7 175,800 180,223 175,000
Uniqlo Japan (Y mn) 51,143 44,821 45,613 1.8 117,100 - -
Uniqlo international (Y mn) 24,316 20,869 30,167 44.6 50,500 - -
Pretax income (Y mn) 106,745 77,666 104,204 34.2 175,800 180,867 175,000
Same-store sales (Uniqlo Japan) (y/y %) 7.5 -2.3 2.5 4.8 2.0 - 2.0
E: Daiwa estimates. CP: Company projections. CE: Consensus estimates (IFIS).

Results overview: In 1Q, revenue rose by 1.6% y/y and operating profit Current rating 3 (Neutral)
advanced 16.7% to Y88.59bn. Pretax income and net income showed Current target price (Y; 14 Oct) 35,000
strong growth due to yen appreciation. While Uniqlo international fared Share price (Y; 12 Jan) 38,010
well, Uniqlo Japan struggled and the GU business saw profit drop, leaving a Market cap (Y mn; 12 Jan) 3,875,812

somewhat negative impression. That said, operating profit on a

Investment Indicators
consolidated basis and for Uniqlo Japan appears to have beaten the
8/16 8/17 E 8/18 E
firm’s estimate. By segment, Uniqlo Japan saw operating profit up 1.8%.
P/E (X) 80.6 35.9 31.7
The gross margin improved a better-than-expected 0.3% as the firm kept a P/B (X) 6.75 5.98 5.29
tight leash on markdowns, and the SG&A ratio rose 0.2 points, which was Dividend yield (%) 0.92 0.92 0.97
also in line with the estimate, after logistics reforms triggered a one-off ROE (%) 7.3 17.7 17.7
increase in logistics costs. Uniqlo international reported operating profit up Net debt/equity (X) -0.2 -0.2 -0.3
44.6%, aided by gross margin improvement and lower SG&A expenses.
While the decline in segment revenue reflected a drag from yen Income Summary: Unchanged
appreciation, revenue growth on a local currency basis surpassed the (IFRS; Y mn) 8/16 8/17 E 8/18 E
company’s projection. Operating profit growth was better than expected in Revenue 1,786,473 1,863,400 2,015,300
Greater China and Southeast Asia/Oceania, while losses in the US Op profit 127,292 175,800 197,500
narrowed on gross margin improvement. Global brands saw operating profit IFIS consensus 180,223 202,737
fall 22.7%, below the firm’s target. In the GU business, same-store sales Pretax income 90,237 175,800 197,500

edged up, but the gross margin declined amid early clearance sales of Net income 48,052 108,100 122,100
EPS (Y) 471.3 1,060.1 1,197.4
autumn merchandise. Although advertising expenses declined, personnel
IFIS consensus 1,071.6 1,214.3
expenses and logistics costs rose.
DPS (Y) 350.00 350.00 370.00
E: Daiwa estimates.
Outlook: On a consolidated basis, yen strength pushed down yen-based Note: Net income is that attributable to shareholders of the parent.
sales by an average 16% in 1Q, but with the yen weakening of late, growth
overseas look set to accelerate from 2Q. Meanwhile, in Uniqlo Japan,
same-stores dropped 5.0% y/y in December, which fell short of the
firm’s target, but sales were apparently strong on the first day of the year.
We caution about gross margin erosion with the company addressing
struggling e-commerce ops by ending its next-day delivery service and due
to bigger discounts in 2Q.

What we recommend: The shares are trading at 35.9X our FY17 EPS
estimate, which represents a 50-60% premium to the average P/E of
22-23X for the retail sector (excl. anomalies). This reflects the global growth
of the firm’s retail operations.

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 Fast Retailing (9983): 12 January 2017

Fast Retailing (9983): Income Summary (Y mn; y/y %)

Year to Revenue Op profit Pretax income Net income EPS (Y) DPS (Y)
8/14 1,382,935 (21) 130,402 (-3) 135,470 (-13) 74,546 (-29) 731.5 300.00
8/15 1,681,781 (22) 164,463 (26) 180,676 (33) 110,027 (48) 1,079.4 350.00
8/16 1,786,473 (6) 127,292 (-23) 90,237 (-50) 48,052 (-56) 471.3 350.00
8/17 E 1,863,400 (4) 175,800 (38) 175,800 (95) 108,100 (125) 1,060.2 350.00
8/18 E 2,015,300 (8) 197,500 (12) 197,500 (12) 122,100 (13) 1,197.5 370.00
8/19 E 2,175,500 (8) 221,000 (12) 221,000 (12) 137,200 (12) 1,345.6 400.00
8/17 CP 1,850,000 (4) 175,000 (37) 175,000 (94) 100,000 (108) 980.7 350.00
E: Daiwa estimates. CP: Company projections.

Chart 1: Quarterly Earnings (IFRS; Y mn; % of revenue)

FY16 17 CP
1Q 2Q 1H 3Q 4Q 2H 1Q
Revenue 520,303 100.0 491,350 100.0 1,011,653 100.0 422,963 100.0 351,857 100.0 774,820 100.0 1,786,473 100.0 528,847 100.0 1,850,000 100.0
(y/y %) (8.5) (4.5) (6.5) (6.2) (5.5) (5.8) (6.2) (1.6) (3.6)
Uniqlo Japan 230,939 44.4 222,754 45.3 453,693 44.8 191,739 45.3 154,385 43.9 346,124 44.7 799,817 44.8 238,850 45.2
(y/y %) (-0.7) (0.4) (-0.2) (4.4) (-112.3) (6.3) (2.5) (3.4)
Uniqlo international 196,943 37.9 192,312 39.1 389,255 38.5 143,558 33.9 122,593 34.8 266,151 34.4 655,406 36.7 196,554 37.2
(y/y %) (17.2) (8.4) (12.7) (5.3) (0.6) (3.1) (8.6) (-0.2)
Global brands 91,825 17.6 75,491 15.4 167,316 16.5 87,034 20.6 74,207 21.1 161,241 20.8 328,557 18.4 92,799 17.5
(y/y %) (17.4) (7.7) (12.9) (12.0) (7.0) (9.6) (11.3) (1.1)
Other 595 0.1 792 0.2 1,387 0.1 633 0.1 671 0.2 1,304 0.2 2,691 0.2 642 0.1
Gross profit 266,269 51.2 210,666 42.9 476,935 47.1 217,440 51.4 170,623 48.5 388,063 50.1 864,998 48.4 270,686 51.2
(y/y %) (5.1) (-6.9) (-0.5) (5.1) (5.3) (5.2) (1.9) (1.7)
SG&A 190,680 36.6 180,049 36.6 370,729 36.6 169,750 40.1 162,477 46.2 332,227 42.9 702,956 39.3 184,193 34.8
(y/y %) (13.5) (7.0) (10.2) (2.0) (-3.9) (-1.0) (4.6) (-3.4)
Other income 795 0.2 126 0.0 921 0.1 956 0.2 486 0.1 1,442 0.2 2,363 0.1 2,765 0.5
Other expenses 463 0.1 7,323 1.5 7,786 0.8 2,157 0.5 27,169 7.7 29,326 3.8 37,112 2.1 667 0.1
Operating profit 75,921 14.6 23,420 4.8 99,341 9.8 46,488 11.0 -18,537 -5.3 27,951 3.6 127,292 7.1 88,591 16.8 175,000 9.5
(y/y %) (-16.9) (-60.1) (-33.8) (18.6) (loss) (94.3) (-22.6) (16.7) (37.5)
Uniqlo Japan 44,821 19.4 19,292 8.7 64,113 14.1 29,103 15.2 9,246 2.6 38,349 4.9 102,462 5.7 45,613 19.1
(y/y %) (-12.4) (-49.7) (-28.3) (19.7) (166.0) (38.0) (-12.6) (1.8)
Uniqlo international 20,869 10.6 8,533 4.4 29,402 7.6 12,833 8.9 -4,797 -1.4 8,036 1.0 37,438 2.1 30,167 15.3
(y/y %) (-14.2) (-54.0) (-31.4) (41.1) (loss) (1,460.4) (-13.7) (44.6)
Global brands 12,401 13.5 1,909 2.5 14,310 8.6 8,746 10.0 -13,536 -3.8 -4,790 -0.6 9,520 0.5 9,582 10.3
(y/y %) (29.7) (-12.5) (21.9) (8.7) (loss) (loss) (-34.0) (-22.7)
Other -109 - 117 14.8 8 0.6 43 6.8 184 0.1 227 0.0 235 0.0 46 -
Eliminations/unallocated -2,062 - -6,430 - -8,492 - -4,239 - -9,633 -13,872 -22,364 3,181 -
Financial income 2,119 0.4 -1,146 - 973 0.1 416 0.1 975 0.3 1,391 0.2 2,364 0.1 16,390 3.1
Financial expenses 374 0.1 17,899 3.6 18,273 1.8 6,851 1.6 14,296 4.1 21,147 2.7 39,420 2.2 776 0.1
Pretax income 77,666 14.9 4,375 0.9 82,041 8.1 40,054 9.5 -31,858 -9.1 8,196 1.1 90,237 5.1 104,204 19.7 175,000 9.5
(y/y %) (-27.2) (-92.3) (-49.9) (-14.1) (loss) (-51.8) (-50.1) (34.2) (93.9)
Income taxes* 26,534 34.2 4,072 93.1 30,606 37.3 14,794 36.9 -9,238 29.0 5,556 67.8 36,162 40.1 30,506 29.3
Net income 51,131 9.8 303 0.1 51,434 5.1 25,260 6.0 -22,620 -6.4 2,640 0.3 54,074 3.0 73,698 13.9
(y/y %) (-29.8) (-99.2) (-53.7) (-13.0) (loss) (-58.9) (-53.9) (44.1)
Noncontrolling interests 3,107 0.6 1,284 0.3 4,391 0.4 1,293 0.3 337 0.1 1,630 0.2 6,021 0.3 4,002 0.8
Net income attributable to 48,024 9.2 -981 - 47,043 4.7 23,967 5.7 -22,958 -6.5 1,009 0.1 48,052 2.7 69,695 13.2 100,000 5.4
shareholders of parent
(y/y %) (-30.2) (loss) (-55.1) (-13.2) (loss) (-80.9) (-56.3) (45.1) (108.1)
Source: Company materials; compiled by Daiwa.
* Percentage figures represent proportion to pretax income.
CP: Company projections.

Chart 2: Uniqlo Japan Sales Growth (y/y %)

FY14 15
Sep 13 Oct Nov Dec Jan 14 Feb Mar Apr May Jun Jul Aug Sep 14 Oct Nov Dec Jan 15 Feb Mar Apr May Jun Jul Aug
Same-store Sales 4.4 -13.8 7.7 1.1 15.0 0.8 0.6 3.3 4.1 2.6 -4.8 3.8 19.7 10.5 1.9 10.2 8.9 7.7 -3.0 19.3 12.3 -11.7 -1.5 2.5
Customer traffic 8.1 -14.1 5.7 -1.0 9.9 -4.2 -6.4 -0.8 -1.3 -3.8 -12.0 -9.9 1.9 0.6 -5.7 -1.4 0.5 -3.0 -10.5 6.7 2.8 -14.6 -6.1 -5.1
Avg. ticket price -3.4 0.4 1.9 2.1 4.6 5.2 7.5 4.1 5.5 6.7 8.2 15.1 17.4 9.8 8.0 11.7 8.4 11.1 8.4 11.8 9.3 3.4 4.9 8.0
Directly-run store + Sales 7.5 -11.4 9.7 4.1 18.0 3.5 4.2 7.0 7.4 6.0 -2.5 6.2 22.0 13.9 4.7 12.1 12.0 10.5 -0.9 19.8 12.8 -10.9 -1.2 3.9
e-commerce sales Customer traffic 11.6 -11.6 7.7 1.6 12.6 -1.5 -2.9 2.7 2.1 -0.7 -9.9 -7.7 3.4 3.3 -3.4 0.3 2.8 -0.1 -8.9 7.3 3.2 -13.8 -5.6 -3.9
Avg. ticket price -3.7 0.2 1.9 2.4 4.9 5.1 7.3 4.2 5.1 6.8 8.2 15.0 18.0 10.3 8.4 11.8 9.0 10.6 8.7 11.6 9.3 3.4 4.7 8.2
FY16 17
Sep 15 Oct Nov Dec Jan 16 Feb Mar Apr May Jun Jul Aug Sep 16 Oct Nov Dec
Same-store Sales 2.6 5.5 -8.9 -11.9 14.6 1.2 -0.3 1.3 5.9 4.5 18.1 -1.0 -3.4 -0.6 7.3 -5.0
Customer traffic -4.2 -3.6 -12.9 -14.6 8.0 -1.8 -8.6 -7.2 -3.6 -3.6 8.1 -1.6 2.1 4.2 4.1 -4.0
Avg. ticket price 7.1 9.4 4.6 3.1 6.0 3.0 9.1 9.1 9.9 8.5 9.2 0.6 -5.4 -4.6 3.0 -1.0
Directly-run store + Sales 3.4 5.9 -8.1 -10.7 16.0 2.4 2.5 2.3 7.6 6.0 19.0 0.2 -2.5 0.2 7.8 -5.0
e-commerce sales Customer traffic -2.9 -3.2 -12.5 -13.8 9.0 -0.7 -6.4 -6.2 -2.3 -2.2 9.0 -0.8 3.0 5.1 4.6 -4.1
Avg. ticket price 6.5 9.4 5.0 3.6 6.4 3.2 9.5 9.1 10.1 8.5 9.2 1.0 -5.3 -4.6 3.1 -0.9
Source: Company materials; compiled by Daiwa.
Note: Same-store sales incl. e-commerce sales from Sep 2016.

Translation/style check/accuracy check: New York Translation Team

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IMPORTANT DISCLOSURE INFORMATION AS OF 01/12/2017

Fast Retailing Co Ltd (9983)
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disclosure, issues rated 1-2 equal Buy; 3 equal Hold/Neutral; and 4-5 equal Sell. Our 1-5 ratings are defined
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1. Outperform local benchmark index by more than 15% over the next 12 months.
2. Outperform local benchmark index by 5 - 15% over the next 12 months.
3. Out/underperform local benchmark index by less than 5% over the next 12 months.
4. Underperform local benchmark index by 5 - 15% over the next 12 months.
5. Underperform local benchmark index by more than 15% over the next 12 months.
*(Criteria above apply to rating updates from Jan 2015. For ratings assigned or updated prior to Jan 2015,
criteria refer to performance vs. benchmark index over 6 months.)
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