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Retail

Uniqlo outstrips Zara as most valuable clothier at $103bn

Fast Retailing still behind Inditex in revenue and profit margin

Uniqlo's focus on Asian markets has paid off as the region has fared better in controlling the coronavirus pandemic. 

TOKYO -- The value of Fast Retailing, the Japanese parent of casual clothing chain Uniqlo, reached 10.87 trillion yen ($103 billion) at the end of trading Tuesday, putting it at the top of the global apparel industry in terms of market capitalization.

This marks the first time Fast Retailing topped Zara's Spanish parent Inditex, which had a market cap of about 81.7 billion euros ($99 billion) at Monday's close and 80.8 billion euros at the end of Tuesday. The Japanese retailer's share price has steadily climbed since last August.

Shareholders like Fast Retailing's focus on Asia, especially China whose economy has recovered quickly from the coronavirus-triggered slump thanks to the government's containment efforts. The casual wear specialist is also viewed as well positioned to capitalize on the changing habits of consumers, who are more inclined to dress casually as telework spreads.

Fast Retailing operated 2,298 Uniqlo stores around the world in November. Sixty percent of those stores are located in Asia outside of Japan. At 791 locations, China is the second biggest market after Japan, with 815 stores.

For the previous fiscal year ended August, the operating margin in greater China, which includes Hong Kong and Taiwan, stood at 14.4%, above Japan's 13%. Meanwhile, 70% of Zara's outlets are located in the U.S. and Europe -- markets that have been hit with multiple lockdowns. Zara has roughly 20% of its stores in Asia.

Investors have valued Fast Retailing's efforts on the digital front too. The company adopted the "digital consumer retailing" concept in 2016, which involves analyzing data from online and store purchases from IC tags attached to all merchandise. Fast Retailing has partnered with Google and other outside companies to develop a manufacturing infrastructure powered by artificial intelligence.

"We have reached the position where we are within reach of the No. 1 rank in the clothing domain," Fast Retailing Chairman and CEO Tadashi Yanai told employees at the start of the year. He made good on that statement in terms of market value: the stock gained for seven straight sessions to close Tuesday at 102,500 yen, up 3% from the previous session and surpassing 100,000 yen for the first time.

But when it comes to revenue, Fast Retailing remains in third place at roughly 2 trillion yen ($18.9 billion) for the previous fiscal year. Inditex leads the way at 28.2 billion euros ($34.1 billion dollar) for the year ended January 2020, while Sweden's H&M is runner-up with 187 billion kronor ($22.5 billion) for the financial year through last November.

Looking at the bottom line for the most recent reporting quarter, Inditex reported a profit of 866 million euros ($1 billion) , or 60% more than Fast Retailing's $680 million profit.

Fast Retailing's return on equity sits at 9% for the year ended August while Inditex enjoys a 24% ROE. Fast Retailing's three-month inventory turnover ratio lags at 1.5 to Inditex's 2.

Most of Inditex's production facilities are in Spain. It minimizes its inventory volume by producing clothes well-suited to logistics, with air transport used to deliver cargo in a short span of time. Because the company is able to sell out its merchandise without offering discounts, it rakes in ample gross profit.

Fast Retailing is neck and neck with Inditex in terms of online sales, the area that will determine growth. In the previous fiscal year, the Japanese company raised digital's share of total sales to 15.6% from 11.3%. E-commerce accounted for 14% of Inditex's revenue in 2019, but it plans to raise that figure to 25% by next year.

Credit Suisse Securities (Japan) analyst Takahiro Kazahaya gives Fast Retailing the edge with regard to future grwoth. "When the footing in Asia is taken into consideration, Fast Retailing is ahead in medium- to long-term growth potential," he said.

Inditex operates 467 stores in China. Last October, Zara opened in Beijing its largest Asian location, spanning more than 3,000 sq. meters.

The growth in Asia is likely to determine the two companies' market valuation going forward.

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