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The anticipated surge in profits for global companies and investors due to China’s reopening has failed to materialize. As the Chinese economy falters, consumers in China are reducing their spending. However, this situation presents an opportunity for Uniqlo, known for its affordable clothing.
Global inequality continues to grow, creating investment prospects not only in luxury goods but also in value retailing.
Fast Retailing, the Japanese parent company of Uniqlo, announced record earnings for the third quarter, surpassing expectations with a 35% increase in operating profit to ¥110.3 billion ($797 million).
Contrary to the belief that brick-and-mortar stores are in decline in China, Uniqlo’s nearly 1,000 outlets in the country have experienced strong sales growth. This has prompted Fast Retailing to raise its full-year forecast to ¥370 billion.
However, this growth also reflects the challenging economic outlook in China. With the local economy slowing down, consumers are losing confidence, youth unemployment is rising, and people are saving more and spending less. This shift in consumer behavior may result in further reductions in clothing purchases.
While Fast Retailing’s shares have seen a significant increase this year, trading at 42 times forward earnings, the stock’s premium may not be sustainable in the long term. Fast Retailing falls behind its global peer Inditex in inventory turnover and operating margins. Inditex also boasts a broader portfolio of brands and utilizes dynamic pricing strategies.
For Uniqlo to achieve its goal of tripling sales to ¥10 trillion over the next decade, it must establish a strong presence in the European and US markets. However, this will likely involve a costly battle with Inditex.
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