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Retail

Uniqlo preps for tariffs and South Korea row after strong year

Fast-fashion giant grows same-store sales for seventh straight term

Uniqlo's Ginza flagship: In addition to headwinds abroad, the retailer faces a turning point in its strategy in Japan of focusing on large stores in prime locations. (Photo by Ken Kobayashi)

TOKYO -- Japanese apparel chain Uniqlo eked out a seventh consecutive year of domestic sales growth, but parent Fast Retailing's outlook is clouded by the U.S.-China trade war and a consumer backlash in South Korea.

Washington's latest round of tariffs against China will likely weigh on Uniqlo's U.S. operations, where it runs 50 stores. Uniqlo is considering relocating Chinese apparel production to Southeast Asia due to the duties. The company looked to turn a profit in the U.S. in the year ended last month, but the operation appears to have bled red ink.

A new Uniqlo store opened in Seoul at the end of August amid the growing bilateral tensions stemming from historical grievances that have turned into a trade dispute. Other South Korean locations are virtually deserted, and sales in the country have apparently fallen short of the 140 billion yen ($1.3 billion) taken in a year earlier.

Sales and operating profit generated abroad are expected to surpass domestic figures for the first time in the year through this past August, yet Uniqlo's stores in Japan remain the backbone of Fast Retailing's business considering the uncertainty overseas.

Same-store sales at Uniqlo's Japanese outlets grew 1% in the year ended Aug. 31, according to figures released on Sept. 3. Customer traffic climbed 3.3%, helped by buzz-worthy collaborations with designers like Alexander Wang and Jonathan Anderson.

The results stand out in an industry where domestic apparel sales at department store have slumped, and same-store sales at rival clothier Shimamura fell for a second straight year.

"If you don't grow, you may as well be dead," Fast Retailing Chairman and CEO Tadashi Yanai has said.

Much of the success can be traced to Uniqlo's scrap-and-build strategy. The domestic chain had roughly 860 outlets, including franchise locations, back in 2014. But faced with signs of saturation, Uniqlo pivoted away from expansion. Store closings began to outnumber openings in the fiscal year that ended August 2015. As of last month, the chain had 817 outlets, slimming down by 24 in four years.

On the other hand, Uniqlo has opened megastores in prime locations such as Tokyo's Ikebukuro and Kichijoji neighborhoods. In the suburbs, the retailer has sprouted up in facilities run by Aeon Mall and in other sprawling shopping centers.

As a result, Uniqlo's sales space per location had jumped nearly 20% in seven years to 942 sq. meters as of the end of February. The bigger stores offer a wider selection, boosting customer traffic.

In fact, the supersize stores were a leading contributor to the seven-year sales streak. The previous seven-year run through 2010 was sustained by Uniqlo's fleece lineup and Heattech thermal wear.

Uniqlo's domestic sales have risen from the year prior in 18 of 23 years, according to Fast Retailing data dating back to 1997. In contrast, Shimamura's annual sales have climbed in only 9 of 16 years since 2004. One Aeon Mall executive said that "Uniqlo is a preferred tenant, even at a discounted lease."

Still, the 1% growth in same-store sales for the past fiscal year is the second lowest in the past seven years, surpassing only the 0.9% gain for the year ended August 2016.

Uniqlo continues to regularly introduce innovative new offerings such as a wireless bra. But "there have hardly been any world-shattering hit products in recent years," said a store employee, indicating the need for a successor to the Heattech or Ultra Light Down collections.

Furthermore, per-customer sales dipped for the first time in two years as warm weather hurt sales of the fall and winter collections, which fetch higher prices. Uniqlo was able to bounce back as high temperatures spurred demand for the spring and summer lineups.

The poor per-customer sales appear to be linked to inventory clearance discounts that lasted through August. Such discounts can boost sales, but the slimmer margins squeeze income. Fast Retailing faced a similar inventory glut for its Heattech items in 2015. The company reformed its logistics operations but the inventory issues remain.

Per-customer sales will be improved by employing artificial intelligence to predict hot sellers. The apparel will be produced at volumes matching demand, which will help to limit discounts.

It remains to be seen, however, if these fixes will be enough to offset the spending hit that will result from the higher consumption tax, which will rise to 10% in October from 8% now.

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