Fast Retailing Co. Ltd. (9983.T) lived up to its name on Oct. 2, when it said its Uniqlo clothing stores enjoyed a 20 percent gain in same store sales. This Reuters story reported that sales of winter clothing were especially strong due to cool early-fall weather. The parent company’s stock rose 1.2 percent and contributed 20 hefty points to the Nikkei market index. Like customers in a dressing room, we try on a few StarMine models to see if Uniqlo’s fashions have staying power.
Fast Retailing generates 71 percent of its revenue in Japan, thanks mainly to its domestic Uniqlo business. However, it’s also in expansion mode, expanding its childrenswear line, opening stores in Europe and vowing to become the world’s biggest fashion retailer (it’s now #4).
Source: Eikon, StarMine
Is it a value stock?
Fast scores an 8 on the StarMine Value-Momentum (Val-Mo) model, which places it in the bottom decile. The model incorporates the Intrinsic and Relative Valuation models. Fast also scores in the bottom decile when it comes to these two models, as seen below.
Source: Eikon, StarMine
Possibly overvalued
Prior to the acquisition of denim clothing label J Brand in 2012, Fast Retailing’s stock was trading at ¥14,315 a share, in line with its fair value, according to the StarMine Intrinsic Valuation model. Today, two years later, while the stock has climbed to ¥37,370 a share, its fair value has remained steady, suggesting a premium of about ¥20,000 a share and leaving it trading at levels that could be considered overvalued, the StarMine model suggests.
Source: Eikon, StarMine
Can growth match optimism?
StarMine Intrinsic Valuation model also suggests that Fast Retailing’s market implied 5-year CAGR is 21.9%, significantly above analysts’ projections of 6.3%, and the industry’s growth median of 4.7%. This suggests that expectations are high and investors are optimistic.
Source: Eikon, StarMine
How sustainable is earnings growth?
Based on the robust StarMine Earnings Quality (EQ) model score of 93, it looks like Fast is in the top decile and profits could be from sustainable sources. The company’s cash flow component has a score of 90 out of 100 — also a top performer by this gauge.
Source: Eikon, StarMine
Great margins
On trailing quarterly margins, Fast’s operating and net margins have remained somewhat stable over the past two years, but are almost twice as strong as the industry median. Meanwhile, its gross margin is the strongest in five years at 56.6%, considerably above the industry average.
Thumbs up for management
To reinforce the strength of its margins, we look at ROE, a measure of how well retailers use capital to generate profits. Industry-wide, ROE is a robust 12%. The analysts’ mean forecast is that Fast Retailing will generate a 14.0% return on equity this year, above the industry mean. Projections remain steady at about 15% for the next four years.
Competition
Looking at a few of Fast’s peers, based on similarity of product offering, the firm has one of the strongest ROE in the group. United Arrows Ltd. seems to sport the highest ROE at 25.8%, significantly above the industry mean.
Still, the StarMine Predicted Surprise suggests that Fast is most likely to surprise the market, post a positive surprise and beat earnings expectations when it reports fourth quarter results on Oct. 8. Currently, the consensus indicates an EPS estimate of ¥11.33 for Q4 2014. However, a highly rated StarMine analyst with a very accurate rating suggests a figure closer to ¥15.71.
Source: Eikon, StarMine
Attractive returns
Finally, the Nikkei 225 index has a P/E ratio of 18.9. The bulk of Japanese retailers are sporting P/E ratios within the 13 – 22 P/E ratio mean – closer to the Nikkei P/E. However, Fast Retailing’s P/E mean is 37.3, well above its competitors, as seen above.
Although expansion plans always carry some challenges, the Uniqlo brand has a very loyal customer base. It remains to be seen whether Fast Retailing can continue to provide investment returns as quickly as customers go through its stores.
Source: Eikon, StarMine
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