This Retailer's on Sale, and I'm Buying

I've been waiting for some of the companies on my watchlist to hit a bump in the road, and one finally looks like it has.

Last week, Fast Retailing (FRCOY -0.20%) reported sales growth of 13% and an earnings jump of 31.8%. But there was disappointment that earnings grew by only 23% in the company's Uniqlo International unit, while same-store sales were soft in Fast Retailing's home market of Japan. Adding to the company's woes are the recent protests against Japan and its companies in China relating to the territorial dispute over the Senkaku/Diaoyu islands.

Having followed the company for a number of years, I believe the current problems are short-term in nature and that the company's international growth plans remain on track. The dispute over the Senkaku/Diaoyu islands is serious, but the economic relationship between the two countries is more important than a few small islands -- even if there are energy reserves to be had. I'm using the recent volatility to start a position in this leading international retailer.

Part cash cow, part growth story
Fast Retailing has five brands under is corporate umbrella, but it is best-known for the Uniqlo brand of affordable, innovative apparel. Sales from the company's Uniqlo stores in Japan contribute 67% of sales and more than 80% of operating profit. This part of the business isn't a fast grower, but it is high-margin and generates the cash to fund international expansion, the development of other brands, and a growing dividend.

The Uniqlo International and "Global Brands" divisions are the rapidly expanding growth stories within Fast Retailing. In the past year, Uniqlo International grew its sales by 63%, while the Global Brands unit grew sales by 23%. That's impressive growth no matter how you slice it. So, while the operating-margin decline at Uniqlo International was disappointing, I believe it owes largely to the opening of one more store than was needed in New York City -- a growing pain that will be overcome in time.

Catalysts coming
More important than the NYC snafu is the fact that Fast Retailing had just three Uniqlo stores in the U.S. during its last fiscal year. It already has opened two more -- one in San Francisco and one in New Jersey -- and has plans to open its U.S. online store this fall, as well. With plans to open its first store in Australia and another 200 to 300 stores globally in each of the next few years, there is plenty of growth still to come from Uniqlo.

The Uniqlo brand is Fast Retailing's primary international growth opportunity, but it also owns the Theory brand and two small French brands, and it is gradually expanding their offerings. One of the experiments is bringing its French lingerie brand, princesse tam.tam, to Japan in a store with Fast Retailing's other brands. I'm not certain this experiment will work out, but I do like how the company is experimenting with ways to combine its brands and bring them to new markets.

Fast Retailing's U.S. expansion is still in its early stages, though it is already accelerating in Asia, where the company opened more than 100 stores last year. With $3.3 billion in cash on the balance sheet, the company can afford to meet its ambitious growth plans and even accelerate its growth when the time is right.

How the competition stacks up
With a market cap of just under $22 billion, Fast Retailing is a large cap. That said, it's still much smaller than Europe's fast-fashion giants, H & M Hennes & Mauritz (HNNMY -2.71%) and Zara owner Industria de Diseno Textil (NASDAQOTH: IDEXY.PK). The table below gives you an idea of how Fast Retailing stacks up against its three closest global competitors on a growth and valuation basis, as well as how reasonably priced the shares are, given their growth potential.

Source: S&P Capital IQ. CAGR = compound annual growth rate.

Foolish final thoughts
When it comes to investing, there are never any guarantees or perfect information, but Fast Retailing has managed its international growth well so far and has the balance sheet strength to stick to its strategy even if the economic waters get more turbulent. I plan to add shares to my globally focused Orange Portfolio in the next few days and am looking forward to what the next few years should bring.

As a reminder, you can follow along with all my real-money Orange Portfolio trades and updates.