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For some investors, choosing clothing retail stocks is as nerve-racking as trying to match a patterned tie with a striped shirt. The pitfalls of retail include appealing to its finicky customers, dealing with a threat of surplus inventory, fighting knock-offs, controlling quality, battling rising commodity costs, and struggling to find new markets for growth. However, one apparel seller avoids many of these issues with its "unique" strategy, and it's fitting into growth markets, as well as squeezing into the comparatively wealthy America.
The fashion industry has gotten to the point where Lululemon (Nasdaq: LULU ) is suing Calvin Klein and G-III Apparel (Nasdaq: GIII ) for patent infringement on its waistband design used on yoga pants. Outside of the courtroom, these firms battle out fashion every few weeks. Lululemon stocks products that have a three, six, or 12-week shelf life, and G-III's Andrew Marc brand is rolling out new advertising based on this year's popular romance novel 50 Shades of Grey. And while many fashion companies obsess over keeping up with trends, one company plans its fashion up to a year earlier to save on costs: Fast Retailing Co. (OTC: FRCOY.PK). This also allows it to avoid one of the trickiest issues in fashion of anticipating the latest styles, as it focuses on the basics of shirts, jeans, and undergarments.
Fast Retailing's home market of Japan makes up two-thirds of the company's sales, where its major Uniqlo brand has been around since 1984. It has 849 stores throughout Japan, and while sales are expected to increase 3.6% this year in the country, operating income is expected to decrease 1.6%. Still, the company looks to earn $1.33 billion in operating income from this market, helping it fuel the attractive growth opportunities that lay ahead for the company.
One opportunity is across the sea, where it plans on opening 100 stores in 2012 on top of the 50 it opened in 2011. Asia now accounts for 70% of overseas sales since opening its first store in Singapore in 2009. For the Chinese market, The Economist notes:
Uniqlo has three advantages. Japan is physically much closer to China than Spain is [where its competitor Zara resides]. It is closer culturally, too. Japanese shapes and styles are similar to Chinese ones. Even the weather is similar. Uniqlo's high-tech clothing makes wearers sweat less during sweltering summers, which is handy. And being Japanese has cachet, among Asia's fashionistas if not its nationalists.
The other opportunity is across the ocean. Uniqlo opened a flagship store in New York in 2011, and is opening two others in San Francisco and New Jersey later this year. According to the Wall Street Journal, the company hopes to add 20 to 30 stores a year in the U.S. With Gap's (NYSE: GPS ) brand stores totaling over 900 in the U.S., and its Banana Republic and Old Navy brands totaling almost 600 and over 1,000, respectively, there could be plenty of market to steal for Uniqlo's $10 polo shirts.
While its products are inexpensive, its stock (on the pink sheets for American investors) sells at a price-earnings ratio of more than 25. That price, though, comes with an expected net income growth of 45% for this year and almost 80% growth for its international Uniqlo operating income. Compared to The Buckle (NYSE: BKE ) , which has a price-earnings ratio of 13 and only grew net income 12% last year, I'd rather pay up for the potential growth of Uniqlo.
Uniqlo isn't guaranteed success in new countries, however. As much as similar culture and fit may help it when expanding in China, the more generous sizing required in the U.S. might find the company sagging in revenue. Also, Uniqlo already tried opening three small stores in New Jersey malls in 2005, but closed them because of poor sales. Hopefully the glamour of its flagship stores solves the branding problems that hurt those smaller shops. Or the brand may become derided for being cheap, just as the fashion-conscious in Japan mock those seen wearing Uniqlo. Also, the maturity of the Japanese brand, which had negative same-store sales last quarter, could hurt the core business while executives are focused internationally.
A good fit
If fashion is anything like technology, what the Japanese wore a decade ago, the rest of the world will be wearing today. It also helps that Uniqlo's low prices go down easy in any economy, while still retaining the allure of a foreign brand. For these reasons, I like Uniqlo's prospects and think it can surmount any issues it will face in America while cashing in on the culturally similar Asian market.
Alternatively, if you would rather hold American companies ready to cash in emerging markets, check out our free report on "3 American Companies Set to Dominate the World."