January 12, 2018 / 4:48 AM / 2 years ago

Breakingviews - Uniqlo owner has too much cash insulation

The price of jeans is shown at a GU shop by Fast Retailing in Osaka, western Japan October 22, 2017. REUTERS/Thomas White

HONG KONG (Reuters Breakingviews) - Fast Retailing is heating up. First-quarter figures offer fresh confirmation of the turnaround at the Japanese retailer behind Uniqlo - and show all those reasonably priced puffer jackets and light weight sweaters have generated a cash pile that now exceeds $7 billion. If Fast Retailing does not share more of the wealth, troublemakers could emerge, however.

There was a lot to like in Thursday’s results. Crucially, problems have been ironed out at Uniqlo International, which now outsells its Japanese counterpart and is almost as profitable: operating margins, at 18.1 percent, are now just 3 percentage points below Uniqlo Japan.

For any prospective investors, much of the good news is already priced in. Three months ago, Fast Retailing was valued attractively compared to Zara’s parent, Inditex. But with the Japanese stock up 35 percent since, and shares in the Spanish giant dipping, the tables have turned: as of Thursday’s close, Fast Retailing fetched 16.5 times forecast EBITDA versus 14 times for its rival.

Another puzzler is that Fast Retailing now reports 789 billion yen($7.1 billion) of cash and equivalents, up 69 percent in a year. Retail is fickle and competitive, and Fast Retailing plans to invest more in online services and logistics. So a little hoarding can be excused. And like most entrepreneurs, founder Tadashi Yanai probably values the independence from banks this war chest offers.

Nor is Fast Retailing exceptional. Corporate Japan is ridiculously flush. Cash holdings at Tokyo-listed companies total 140 percent of national GDP, according to Jesper Koll, the head of WisdomTree in Japan - more than three times the U.S. ratio.

Still, this makes a promised annual dividend totalling about 37 billion yen look stingy. And the cash pile matches the $5.9 billion amassed by Inditex and the $1.2 billion at H&M put together, according to the most recent results for the pair.

Solid companies with conservative balance sheets have become targets for shareholder activists. And Japan is no longer immune. Fast Retailing might want to think about handing some of this extra padding back via buybacks or special dividends, or it could come under pressure to peel off the layers.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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