Subject: Uniqulo:Reading foreign company profits
or the importance of being Earnest.

I've made no secret of the fact that, for decades, I've heavily invested in foreign equities and currencies. Sometimes this has been more profitable than staying strictly domestic - and sometimes not. Much of what I had traditionally investeed in was in the "natural resource" catagory (a nice way to say mining companies, oil service companies and such). Frankly, when I buy foreign shares, I do not hedge the curreency as one of my theories of diversification is that they currency acts as my hedge against a drop in the US dollar.

One of the companies that I have a holding in is the Japanese firm "Fast Retailing", affectionately known on the Tokeyo stock exchange as number "9983" ands who counts the global popular retail line of "Uniqulo" as its most prominant holding. The following is not meant as a stock recommendation, but rather poiinting out a stock worth considering if its price drops for some reason. While there are ADR's available on US markets, the stock is far more liquid on the Tokyo exhange (available through brokers like Interactive Brokers).

This is how they have to visualize the world:

In China, despite the nationalism that at times led to pushback against Japanese and foreign brands, Fast Retailing could still be ranked number two with a 1.7% market share in 2023, just 0.5 percentage points below domestic leader Anta, as per Euromonitor. Since 2019, Uniqlo, as a single brand, has been the market share leader in China.

UNIQLO has about 2,500 stores worldwide, about 800 of which are in Japan and somewhat under 800 in North America (US and Canada). While China is its largest overseas market, Uniqlo's push into North America and Europe has yielded substantial returns. In fiscal year 2024, Uniqlo International outperformed management expectations, with North America seeing a 32.8% increase in revenue. In 2024, Uniqlo specifically targeted the Gen Z segment, capturing share from peers like Old Navy and Forever 21. It also made significant inroads in specific geographic areas, such as the Texas market, where it took 29% market share from Zara.

Fast Retailing, with sales of about $21B is about the same size as the Swedish international H&M fashion retailer and about half the size of Spanish Inditex (Zara's parent company). That said, Fast Retailing growth last year was about 18%, Inditex was about 9% and H&M had negative growth. Thesee metrics are reflected in market caps of about $102B for Fast Retailing, $135B for Inditex and about $23 for H&M.

Cost savings are extracted from direct procurement of high-quality natural raw materials from producers, enabled by its scale, which contribute to Uniqlo’s cost advantage, as well as brand equity. Fast Retailing secures a stable supply of materials at low cost by forming long-term relationships and directly negotiating prices with material manufacturers worldwide. These natural raw materials include Supima cotton, cashmere, Merino wool, and premium linen used for its core products.

The partnership with the major Japanese fabric mill Toray, initially formed in 1999, plays a crucial part to Uniqlo’s brand of providing high-quality functional clothing at low prices. Toray’s global leadership is demonstrated by its supply of carbon fiber to Boeing since 1975—the fiber is used in the Boeing 737. Many of Uniqlo’s bestselling products, including Heattech thermowear, Airism cooling touch innerwear, ultra light downs and Dry-Ex, employ fabrics jointly developed with Toray. Uniqlo's establishment of sub-brands of its functional apparel is unique among apparel retailers and resembles the brand strategies of sportswear companies. Fast Retailing projected in 2015 that the transactions between the two companies would reach JPY 1 trillion during 2016-20, translating to 9% contribution from Fast Retailing to Toray’s revenue. The partnership between Fast Retailing and Toray is unique and entrenched. For example, Toray set up a business unit for Fast Retailing, under the direct leadership of Toray’s president, and the research and development teams of both Toray and Fast Retailing meet almost daily.

Another example is that Fast Retailing is listed as a main client of world-famous Japanese denim miller Kaihara, which commands half of Japan’s denim market share, as per Kaihara’s website. Kaihara supplies denim to Uniqlo with specific spinning standards and dyeing specifications. In 2024, it was estimated that Fast Retailing accounted for 28% of narrow-moat leading apparel manufacturer Shenzhou International’s revenue.

Uniqlo’s gross margins are highly affected by currency fluctuations, because its input costs are dominated in US dollars while sales are mostly generated in Japanese yen and other non-US-dollar currencies. Fast Retailing hedges a significant portion of Uniqlo’s costs for as far as three years ahead through forward contracts. Likewise, the movement of local currencies of its major production countries against the US dollar also affects gross margins, as labor costs and overhead, estimated to represent about half of the production costs, are incurred in local currencies. The appreciation of local currencies against the US dollar could trigger price hikes by suppliers as their costs rise. China, followed by Vietnam, Bangladesh, and Indonesia, remain the largest production sites for Uniqlo’s products, although Fast Retailing has been diversifying its production locations away from China. It is estimated that China represents two thirds of Uniqlo’s production.

Jeff