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1、,EV/GCI,2.5,H&M,1.0,0.5,August 17,2011Japan:RetailJapan 2020:Fast Retailings Uniqlopoised to take off in AsiaEquity Research,Uniqlo is well positioned to grow in AsiaFast Retailing(9983.T)is focused on high-quality,lower-cost basics.Itoffers unique value with a focused product lineup of 300-400 item
2、s(rivalscarry+1,000)via integrated planning,development,and production.If itcan harness similarities in physique,culture,and geography in the,FAST RETAILING:(9983.T,BUY)12-month target price of 16,700 is based on FY8/15EEV/GCI vs.CROCI/WACC(equals a 19X P/E on FY8/13Egoodwill-adjusted EPS of 887)Ris
3、ks are high sourcingcosts in China,higher labor/rent costs eroding margins.FAST RETAILING:FY8/20 SALES/OP FORECASTS,fragmented but growing Asian market,FR has plenty of room to grow.,2011/8E,2020/8E,Cons-basis SalesChinaAsia ex china,(mn),830,00041,40034,700,1,589,000500,000160,000,FRs high CROCI/FC
4、F outlook is like Inditex/H&Ms a decade ago,Europe/USADomestic,21,900607,000,70,000720,000,We expect FRs FCF to nearly double(1.9X)in next five years with CROCIsteady at 19%,putting FR on a growth path like Inditex and H&M in thepast decade when their shares climbed.We apply a two-year,6%WACC,Cons-b
5、asis OPChinaAsia ex chinaEurope/USADomestic,(mn),119,5005,2006,500(1,900)107,000,247,00085,00030,0006,000126,000,discount to a 18,700 theoretical value based on global specialty retailerFY8/15E EV/GCI vs.CROCI/WACC to derive a 12-month target of 16,700China sales of 500 bn in 2020,price correction m
6、ay be catalyst,Source:Company data,Goldman Sachs Research estimates.FY8/13 DIRECTORS CUT GLOBAL PEER GROUPCOMPARISONEV/GCI,CROCI/WACC FY3,We expect a growing middle class to lift Chinas annual apparel sales to22 tn in 2020 from 12 tn in 2010,and we think FR can pick up 2.2 pts of,2.01.5,Next,Inditex
7、,market share(500 bn in sales)as per-capita spending and recognition as,Fast RetailingFY3,Abercrombie&Fitch,its brand grows.FR has had problems with hiring and opening stores,butis now adding staff and is a favorite of developers,enabling it to boost,GAP,Fast RetailingFY5Fast Retailing 2020,Esprit,s
8、ales of innerwear,a strong suit.Its prices are lower than other global,0.0,0.0,1.0,2.0,3.0,4.0,5.0,6.0,CROCI/WACC,brands in China.Based on Japans experience,we think Uniqlos mindshare could take off in China,where clothing prices are quite high,if itsprices come down(this is not factored into our cu
9、rrent estimates).FR leads Inditex,H rising cotton cost riskFR needs to develop a new category like sportswear to expand after threeyears of inners-driven growth.It faces the risk of higher sourcing costs inChina,like rivals.Cotton prices have fallen back,and given a strong three-year yen outlook,we
10、do not think cotton will be a critical risk.,Source:Goldman Sachs Research estimates.RELATED RESEARCHFast Retailing(9983.T):Uniqlo to take off in Asia;upgradingto Buy from Neutral,August 17,2011Japan:Portfolio Strategy:Japan 2020-Looking backwardand forward into the future,October 26,2010http:/Kawan
11、o+81(3)6437-9905 Goldman Sachs Japan Co.,Ltd.Keiti(Huiting)Wei+81(3)6437-9983 Goldman Sachs Japan Co.,Ltd.Naoki Furukawa,+81(3)6437-9943 Goldman Sachs Japan Co.,Ltd.Goldman Sachs does and seeks to do business with companies covered in its research reports.As a result,investorsshould be aware that th
12、e firm may have a conflict of interest that could affect the objectivity of this report.Investorsshould consider this report as only a single factor in making their investment decision.For Reg AC see the end of thetext.For other important disclosures,see the Disclosure Appendix,or go to Analystsempl
13、oyed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.,The Goldman Sachs Group,Inc.,Global Investment Research,3,3,8,9,21,23,25,27,31,33,38,2,August 17,2011,Japan:Retail,Table of contentsUniqlo goes global:Our 2020 projections reflect overseas potentialSup
14、erior business model:Factors behind Uniqlos Asian successWe forecast Uniqlo FY8/20 consolidated operating profits of 247 bn16,700 target price based on our FY8/15 ests.(19X FY8/13E adj.EPS)China:Highly-fragmented market,apparel price correction a major opportunity;Fast Retailing building up its base
15、12Fast Retailing well regarded in Korea,Hong Kong,Taiwan;high growth potential in ASEAN alsoDeveloping new categories in Japan is necessaryRisks:Higher costs for Chinese labor,rent,cotton,other materialsWe see CROCI staying steady at around 19%FCF generating capacity is share price driver,very simil
16、ar to H&M,InditexUsing GS SUSTAIN to value Fast RetailingAppendix:Chinas retail market,retail formats,locationsPrices in this report are based on the market close of August 16,2011 unless noted otherwise.Goldman Sachs Global Investment Research,3,August 17,2011,Japan:Retail,Uniqlo goes global:Our 20
17、20 projections reflect overseas potentialJapan 2020 is a new series of reports aiming to highlight trends that will transform theJapanese investment environment over the next ten years.In our first report,we look atUniqlo,already a popular brand in Japan.Uniqlo is expanding aggressively in Asia,anda
18、ims to become a global brand.Fast Retailing,which owns the Uniqlo brand,is applying the highly successful businessmodel it developed in Japan across Asia to offer high-quality,reasonably priced apparel.Fast Retailings dynamic management team has elevated overseas expansion to a toppriority in its st
19、rategy.Our FY8/20 operating profit projection of 247 bn(our FY8/11forecast:119.5 bn)factors in overseas potential with the China business contributing 85bn(5.2 bn)and other Asian businesses 30 bn(6.5 bn).Our new 12-month price target is16,700(potential upside of 16%).Our target is based on FY8/15E E
20、V/GCI vs.CROCI/WACC.Superior business model:Factors behind Uniqlos Asian successUniqlo is Japans first real specialty store retailer of private label apparel.It targets a massmarket with low/medium-priced products(mass manufacturing,mass sales).We see thefollowing factors behind its success not only
21、 in Japan but in Asia also.Business model strengthsProcuring materials six months to a year in advance,the Uniqlo model is designed tobenefit from large scale(see Exhibit 1).Compared with other apparel retailers,this allows itto offer high-quality basics at relatively low prices.Fast Retailing has a
22、lso partnered withtextiles major Toray,for example,to develop functional materials it uses to makedifferentiated products.The vertically integrated model means long lead times and development loss risk forproducts that do not sell well.To reduce this risk,Fast Retailing has expanded in basiccategori
23、es like innerwear,led by the Heat Tech and Sarafine series,over the past threeyears.The Uniqlo brand has in the past few years taken market share from Wacoal inunderwear and from Right-on and Levis in denim-wear.Fast Retailing recently set up adedicated sportswear team and is looking to expand more
24、aggressively in this segment.Why the Uniqlo model works overseasSpecialty store retailers with private label apparel,or SPAs,have their owns brands theycan use to create their own unique appeal in other markets.Creating such an appeal viaproduct differentiation is where home appliance retailers or h
25、ome improvement centers,which center on national brands,often run into difficulty.Why the model is hard for others to replicateUniqlo is a fully integrated apparel manufacturer,so it is able to keep the quality of eachitem in its lineup high,and it offers better value(quality relative to price)than
26、even topglobal retailers like Inditex(main brand is Zara)and H&M.It has higher total asset turnoverthan Inditex and H&M(see Exhibits 2 and 3).We think global rivals would find it hard toimitate the Uniqlo model because doing so would risk damaging the business models theyhave built up thus far.Dupli
27、cating the model from scratch would require fresh capital,brand investment,and time.Goldman Sachs Global Investment Research,4,August 17,2011,Japan:Retail,Why Asian markets are more promising than European/US marketsThe top brands have high market shares in the already established European and USmar
28、kets,whereas Asian markets are much less concentrated and have high growthpotential.Japanese brands benefit from a geographical advantage in entering Asianmarkets along with an image for high quality and similar sizing(Asian nations use thesame S,M,L,and XL sizes as Japan).RisksProcurement cost incr
29、eases in China are a risk,but that is the same for other companiesalso.We do not see this as a critical risk,however,as we expect cotton prices to settledown and see Fast Retailing benefiting from the strong yen over the next three years.FastRetailing enters into annual forward forex contracts on a
30、three-year rolling basis,so currentyen strength will have an impact(a positive one)three years from now.Personnel costs and rents are poised to rise in China in conjunction with economic growth.We think even a 50%rise in personnel costs and rents over the next five years(10%rise peryear)could be off
31、set by roughly 25%growth in same-store sales over the same period(5%growth per year),allowing the company to maintain its current operating margin.We seethis as a risk in the event same-store sales were to slow from their current double-digit(%)pace.ChallengesTwo longstanding challenges to growth in
32、 the companys China business are cultivatingstore manager personnel and developing new store locations.Fast Retailing has beenstepping up the hiring of new college graduates in China since 2009 or so in order toenable it to accelerate the pace of store openings,with hiring doubling each year.Based o
33、na variety of hiring and personnel training assumptions,we estimate the company will beable to open 70 stores in FY8/12(140 store manager candidates)and 150 in FY8/13(305;see Exhibit 24).Long term,Fast Retailing will need to focus on cultivating/securingpersonnel in order to enable it to raise servi
34、ce levels and open new stores stably.Development of store locations is centered on roadside stores in cities and shoppingcenters,and Fast Retailing is actively opening stores not only in first-tier cities but insecond-and third-tier ones as well.Fast Retailing receives many inquiries from leadingdev
35、elopers and is one of the more popular tenants,alongside Zara and H&M.The companymay reap some benefits from having moved its developer group to China,but we thinkcaution is still warranted in assessing the potential of sales in shopping centers in which itplans to open stores partly because sales c
36、ould be affected by other tenants customerappeal could have.Goldman Sachs Global Investment Research,-,-,-,-,5,August 17,2011,Japan:Retail,Exhibit 1:Uniqlos business model delivers high quality by procuring materials 6-12 months in advance and seekingeconomies of scaleComparison of apparel company b
37、usiness modelsTraditional SPA,Uniqlo,Gap,Zara,H&M,Shimamura,Point,Strengths of Uniqlos business model(1)Whittles down number of items/SKUs(Focus is on basics)(2)Internal development/procurement ofmaterials and aftercare,Business modelNumber of itemsCycleNumber of items peryear,VerticalIntegration-li
38、keSPA3003900,Horizontaldivision SPA500-70042,000-2,800,Vertical IntegrationSPA1,2001012,000,Horizontaldivision SPA2,500-3,0001025,000-30,000,Horizontaldivision SPA20,0009180,000,Buying SPALF 100/GW 2006LF 500/GW 1,000,Sales floor space,800,1,000,100-300,8weeks,From planning todisplay,26 weeks,9 week
39、s,4 weeks,4 weeks,4-8 weeks,(2-3 weeksfor additional,orders),ResultsLead times tend to be longer but.the major benefits includeLarge single-product volumes,Product PlanningProduction controlSourcing(raw material andfactories),StrongStrongStrong,StrongMediumStrong,StrongStrongStrong,StrongWeakStrong,
40、MediumWeakMedium,WeakWeakWeak,Best-sellers:About 50 mn HeatTechitems sold in FY8/10;about 10 mn denim,wear sold in FY8/09Procurement of differentiated/high-,Production,Outsourcing,Outsourcing,Partly outsourcingPartly owned factories,Outsourcing,Outsourcing,Outsourcing,quality materials,Ex.:Strategic
41、 tie-up with Toray,Materials Development,Medium,Weak,Medium,Weak,Weak,Weak,Industries,a major textiles makers,Greater volume discounts on materials,Number of designers,80+,120,Designers:80Patterners:50,Zero,Outsource,procured on its own vs.trading company,channels,Place of production,More than 90%in
42、China,All over the world,Corunna(Spain):60%,Asia:60%(China30%)Europe:40%,More than 90%inChina,China,Note:Business functions ranked as strong(S),moderate(M),and weak(W).SPA=specialty store retailer of private label apparel.Source:Company data,interviews.,Exhibit 2:Uniqlo surpasses Inditex,H&M in asse
43、tefficiencyFY8/09 total asset turnover(%)=sales/total assets200%180%,Exhibit 3:Uniqlo ranks alongside Inditex,H&M in EBITmarginFY8/09 EBIT marginEBIT Margin(%)25%,160%20%140%,120%100%80%60%40%,15%10%5%,20%0%,0%,H&M,Inditex,Domestic Uniqlo,Fast Retailing,H&M,Inditex,Fast Retailing,Note:Domestic Uniql
44、o includes directly operated stores only.Fast Retailing,margin is on a consolidated basis.,Source:Company data.Goldman Sachs Global Investment Research,Source:Company data.,6,August 17,2011,Japan:RetailCentralized organization under the founder essential to accelerated growthFast Retailings speedy g
45、rowth has been facilitated by strong centralized leadership underits founder Tadashi Yanai.Similar examples of fast growth under a founder/owner in theJapanese retail sector can be seen with Noboru Yamada of Yamada Denki and Akio Nitoriof Nitori.As founder and major shareholder,Mr.Yanai has pushed F
46、ast Retailingsoverseas development.The founder and majority shareholder(59.3%)of Spains Inditex,Amancio Ortega,hasstrongly promoted the companys international development.On the other hand,thefounders of H&M and GAP do not wield so much management power.We think FastRetailings type of organization i
47、s advantageous in spurring overseas expansion(seeExhibit 4).Exhibit 4:Inditex and Fast Retailing retain strong leadership by foundersFounders,CEOs of global apparel brands,Inditex:Mr.Ortega,CEO&Chairman&FounderFast Retailing:Mr.Yanai,CEO&Chairman&Founder,H&M:Mr.Stefan Persson is Chairman,Mr.Karl-Joh
48、an Persson(Stefans son)is CEOFounder is Mr.Erling Persson(Stefans father)GAP:Mr.Glenn K.Murphy is CEO&ChairmanFounder is Mr.Donald Fisher,Note:Mr.Ortega of Inditex relinquished the CEO position to Pablo Islain in January 2011.Source:Company data.Production/R&D divisions located close to factoriesFas
49、t Retailing has located its corporate production/R&D divisions in Shanghai,close to itsfactories.This resembles the style of Inditex,which concentratesplanning/procurement/production functions in one location.We think this has facilitatedthe companys dynamic store development in Asia.Inditex,which h
50、as been successful in expanding overseas,centralizes all the mainfunctions(product planning,materials procurement,production and distribution)at itsSpain HQ.It then distributes products directly to its stores in each country.This allows it tokeep additional investment costs down to a minimum when op
