INTRODUCTION:

Uniqlo is a clothing retailer which uses a Specialty Store Retailer of Private Label Apparel (SPA) business model meaning they manufacture all their product lines and control the entire production process. Their products are mainly designed to be basic, timeless and able to fit into any outfit. Due to the nature of their products, it fits the taste and preference of Asian countries where consumers prefer products which don’t make them unnecessarily stand out. Uniqlo positions itself away from fast fashion which frees up cash as they do not have to constantly purchase more and more inventory to purchase newer more trendy flavor of the month clothes.

INVESTMENT THESIS 1:

COST ADVANTAGE

Uniqlo is not in the business of fast fashion unlike their competitors, this means that Uniqlo is able to buy in bulk as they are not worried about their products going out of style with their customers, meaning that clothes stay on the rack for longer periods of time. This affords Uniqlo very large economies of scale as they are able to offer higher quality products at the same or even lower price than their competitors.

INVESTMENT THESIS 2:

BUSINESS MODEL

Uniqlo does not need to spend as much on getting more inventory freeing up more cash for R&D, as evident from their recent innovations like HeatTech and AIRISM. Focusing on not only a basic look but also a clothing line that provides for a lot of utility.

INVESTMENT THESIS 3:

DIFFERENCE IN AREA OF OPERATIONS

Uniqlo operates mainly in Asia, whereas H&M and Zara in Europe and the US. Which may be good because Asia is an upcoming economy where they have a large need for smart casual and as these countries get wealthier, their disposable income increases as well. So the potential addressable market for Asia is very big and Uniqlo is situated perfectly to capitalize on that.

REVENUE:
UNIQLO
When forecasting Number of Stores, I followed this statement made by management
“We plan to accelerate store openings, targeting 30 new stores annually each in North America and Europe, 100 annual store openings in the Greater China region, and 70-80 annual openings in Southeast Asia & Oceania” – 2022 Earnings Report. AND “In FY2023…We plan to open…40 UNIQLO Japan stores”.
For Japan, following historic Y/Y growth trend I’ll assume that Uniqlo grows aggressively for the next 3 years as they have been very conservative for the entire covid episode before this growth tapers off.
For international, as international stores include a large number of countries e.g. China, Europe etc. These are areas where Uniqlo’s management have stated they want to plant the seeds of growth in. Focusing on expanding before fully monetizing the stores. So I’ll assume aggressive growth at more than double of historic amount for 4 years.
When forecasting Revenue/Store, given that Uniqlo prides itself as being a brand that is “made for all”. And customers have grown to associate Uniqlo as being affordable yet high quality.
For Japan, I’ll assume that most of the revenue growth per store does not come from prices being elevated but rather premium clothing that can be charged a higher price. I don’t think that much of the growth will be driven by quantity sold as well given that Uniqlo is not a fast fashion clothing store. So, given that R&D is uncertain and takes time I’ll assume that Revenue/store has a meager growth.
For the entire of my forecasted period having a CAGR of 1% Y/Y
For International, as Uniqlo enters the market through quick expansion by offering lower prices at the store at the very beginning of the growth period. Past the aggressive growth phase I’ll assume that revenue grows at an elevated pace as Uniqlo begins monetizing the stores.
GU
When forecasting Number of Stores, the GU brand is a new brand that isn’t as mature as the Uniqlo brand. With very little management guidance other than a 2016 growth strategy slides presentation by management where they want to “open 40~50 stores annually” (SOURCE). However, in reality this goal was missed by a very large margin in very recent years. So, taking a mix of this optimistic expectation by management and actual historic numbers I came up with a growth forecast for GU. Assuming aggressive expansion for 6 years before it tapers off.
When forecasting Revenue/Store, GU is positioned as a fast fashion (SOURCE) business so the Revenue/Store of Uniqlo stores is an inaccurate proxy to use for what GU’s revenue/store could look like at a mature state. So, I looked at competitors’ numbers as a proxy instead. Zara had an average Revenue/Store of 860M Yen and H&M had an average Revenue/Store of 600M Yen. So, I assume that in a mature state GU had an average Revenue/Store of 750M Yen.
Other Brands
When forecasting Number of Stores, as the other brands are not as profitable and in fact as of FY22 have negative operating profits. I’ll assume that the trend of stores closing down continues for the next 2 years before slow and meager organic expansion continues.
When forecasting Revenue/Store, as the less profitable business with little traction are closed down. Only the profitable ones with higher traction are left around which bumps up our Revenue/Store. In fact, this trend has been true for the past few years. But, as Other Brands slow down the rate of store expansion and focus more on organic growth the Y/Y growth in Revenue/Store will slow down too.
COST:
Cost of Sales
Cost of Sales I’m assuming it is the cost of producing the shirts, as Uniqlo operates more stores and is required to buy more materials in bulk to stock their stores.
When forecasting Cost of Sales, I’ll assume that they enjoy some economies of scale and their cost of sales goes down.
SG&A
When forecasting SG&A, I believe that the human to human interaction in stores will still play a very big part in the next 10 years. SG&A is unlikely to shift drastically, however I believe that AI could be used alongside human workers to lower the necessary labor needed per store, bringing down SG&A.
Others
When forecasting Others, opting for less granularity I followed historic trends.
CHANGE IN NWC:
Receivables
When forecasting Receivables, as historically Day Receivables remained more or less constant over time opting for less granularity I followed historic trends.
Inventory
When forecasting Inventory, given that during Covid-19 Day Inventory was raised due to shipping constraint. In fact, the effects of Covid-19 is still prevalent in Day Inventory as of 2022. I’ll assume that Day Inventory remains elevated for 1 year due to residual Covid-19 effects before tapering down to 2019 levels.
Receivables
When forecasting Payables, Uniqlo gets a lot of leverage over suppliers given that they are buying in a large bulk. As Uniqlo opens up more stores they are able to buy in even larger quantities allowing them to negotiate for a more favorable term. So Day payable has a meager increase overtime.
CapEX and D&A:
D&A
Opting for less granularity I followed historic trends.

CapEX
Management has been getting capital efficient due to Covid-19 for the past few years. And due to the aggressive expansion, I’ll assume management is at an elevated CapEX for 5 years before tapering to being capital efficient.
SANITY CHECK:
Looking at the ROIC from (SOURCE) and Historic ROIC, at expansion phase ROIC is in line with these numbers. But at the monetization phase, ROIC is slightly elevated to reflect the growing premium or how much more valuable the Uniqlo brand will become.
WACC:
Because Japan is a country that experienced a significant stagflationary issue before Covid-19. It’s hard for me to come up with a WACC as it’s hard for me to pinpoint what exactly would be the terminal growth rate for Japan moving out of Covid-19.
The risk free rate is also another issue. From 2019 onwards, Japan’s 10Y T-Bond actually yielded negative because of how chronic deflation had became in their society.
So, I’ve decided to take the average WACC for apparel industry from (SOURCE) at 9.15%

CONCLUSION:

Ultimately, I valued Fast Retailing at JPY 38,420 for my base case. I believe that there is still much room for Fast Retailing to grow and the business will only get more profitable from here once they decide either to cut the Other Brands loose or find a way to turn them around. Uniqlo is tackling a growing middle class Asian economy where its offerings addresses the needs of these economies as compared to their rivals. However, the uncertainty revolving Fast Retailing is that one of their largest revenue driver Japan is undergoing stagflation so a significant portion of their business could be affected, explaining the less favorable valuation.

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