Muji Owner Suffers Worst-Ever Drop on Widespread Profit Problems

(Bloomberg) -- Shares of Ryohin Keikaku Co. tumbled 19%, the most on record, after the Muji operator cut its profit forecast, citing uncertainty in its East Asian operations.

The retailer of everything from furniture to clothing and food last Friday lowered its full-year operating profit target 17% to 37.8 billion yen ($343 million). It reported third-quarter operating profit of 9.2 billion yen versus the average analyst estimate of 12 billion yen.

Meanwhile, shares of peer Fast Retailing Co. rebounded 2.2%, recouping most of its post-results loss on Friday. The Uniqlo parent similarly lowered its outlook amid the impact of political protests in Hong Kong and Japan’s trade spat with South Korea.

“Both of them suffer from issues in Korea and Hong Kong, but the consensus is that for Fast Retailing, the problems are isolated and therefore temporary,” Jefferies Japan Ltd. analyst Michael Jon Allen said by phone. “But for Ryohin Keikaku, investors think it’s a structural problem, because it’s affecting across all regions.”

Read more about Muji’s struggles here.

CLSA Securities Japan Co. analyst Nigel Muston downgraded Ryohin Keikaku two notches to underperform from buy. The stock isn’t expensive but the company faces “a range of issues both at home and abroad,” he wrote in a report.

Here’s more from analysts on Ryohin Keikaku:

Bloomberg Intelligence (Catherine Lim)

• The company “will likely forgo profits this year” to focus on reducing inventories.
• Margins were hurt in 3Q by discounting, which is likely to continue.
• The decision to scale back store openings in Japan and China in fiscal 2H ending February may drive profit gains through 2021.

CLSA (Nigel Muston)

• Domestic same-store sales rose 8.5% in 3Q, but this lagged the company’s expectations so inventory climbed 25% y/y. Japan profits were hurt by discounts and “poorly planned promotions” around time of sales tax hike.
• A sustainable China recovery still looks “some way off,” as sales growth slowed to 7.1% vs 14.8% in 2Q.
• “Tough situations” in South Korea and Hong Kong led to big declines in sales and profits, and the timing of a recovery is unclear.

Jefferies (Michael Jon Allen)

• The 3Q operating margin was 8.3% versus the analyst consensus 10.6% and company target 12.3%.
• Revenue shortfalls were likely larger than management expected in almost every region.
• Flat profit in China was disappointing and indicates “a more permanent and more damaging loss of market share” than the company expected.
• Management’s strategy to sacrifice margins for growth “appears to have not succeeded, and unfortunately, this is a very difficult policy to reverse once it is initiated.”

SMBC Nikko (Kuni Kanamori)

• The profit miss is “a big negative surprise” after the shares had rebounded on strong domestic same-store sales.
• It’s disappointing that earnings recovery has been pushed back.
• Earnings were hurt in 3Q by losses in Hong Kong and Taiwan, flat profits in China on forex and promotions, plus “major promotional spending” in Japan.

To contact the reporters on this story: Kurt Schussler in Tokyo at kschussler1@bloomberg.net;Shoko Oda in Tokyo at soda13@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Tim Smith, Jeff Sutherland

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