Uniqlo Clothes Are Loved Outside Japan. Its Shares, Not So Much

(Bloomberg) -- While Fast Retailing Co.’s Uniqlo brand clothes are a big hit outside Japan, overseas investors haven’t been drawn to its shares.

Foreign shareholders account for about 18 percent, about half the average for the 10 largest Japanese companies, excluding former government-owned monopolies.

Valuation may be one reason. While the company forecast record annual sales and profit earlier this month, it comes last among a group of global peers in return on equity and operating margin. It’s also the most expensive relative to reported earnings, and its weighted average cost of capital is almost double the median for Japan’s 20 largest traded companies, excluding financial firms.

“When I mention Fast Retailing to foreign investors, the only thing they are interested in doing is shorting it,” said Mike Allen, an analyst at Jefferies Japan Ltd. “The valuations are insane.”

Fast Retailing declined to comment on its stock.

To be sure, foreign investors have missed out on an $18 billion surge in the company’s market value as its shares jumped more than 50 percent over the past 12 months, driven partly by the surge in sales overseas. And while Fast Retailing’s 19 percent return on equity is well below that of its global peers, it’s also higher than the Nikkei 225 Stock Average mean.

Even those who find the company’s valuation too rich may be reluctant to short the stock. That’s because many Japanese institutions hold the shares long-term to keep pace with the Nikkei 225, in which Fast Retailing has the highest weighting at about 9 percent.

So even though the valuations for the stock are unattractive, there has to be some sort of catalyst to make investors push prices down closer to where global peers trade, Allen said. That could take years.

“Fast Retailing is a phenomenal company,” Allen said. “But phenomenality doesn’t last. They are in the same place now The Gap was 20 years ago. Someday, Uniqlo is going to trade at 15 times earnings. Even if that’s 10 years from now, if they do trade there, you are going to lose money.”

To contact the reporter on this story: Dave McCombs in Tokyo at dmccombs@bloomberg.net

To contact the editors responsible for this story: Young-Sam Cho at ycho2@bloomberg.net, Dave McCombs, Jeff Sutherland

©2018 Bloomberg L.P.