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Fast Retailing Feels Pain of Price Cuts at Uniqlo

Inside Fast Retailing's Uniqlo Store Ahead Of EarningsInside Fast Retailing's Uniqlo Store Ahead Of Earnings
An employee folds a shirt displayed at Fast Retailing Co.'s Uniqlo store in the Ginza district of Tokyo, Japan. Photograph by Bloomberg via Getty Images

Fast Retailing cut its outlook on Thursday after price cuts at its clothing chain Uniqlo hurt quarterly profit, reflecting the weight of chronic deflation that the government is combating with monetary easing and fiscal spending.

The retailer built its empire during Japan’s decades of deflation with affordable casual wear. It raised prices in 2014 as Prime Minister Shinzo Abe’s expansionary policies boosted stock prices and inflation expectations.

But it introduced discounts last year and cut prices further in January and February, as stalled growth and weak wage increases turned consumers wary yet again.

In its fiscal second quarter through February, the retailer reported operating profit of 23.4 billion yen ($215 million), down from 58.7 billion yen in the same period a year earlier and far weaker than the market’s average forecast of 51 billion according to Thomson Reuters data.

It said it now expected operating profit of 120 billion yen for the full year through end-August. It had cut the outlook to 180 billion yen in January from an earlier 200 billion.

Japan’s economy shrank in October-December last year on weak exports and consumption, and some analysts say it could contract again in January-March, meeting the definition of a recession.

Retailers and restaurant chains which raised prices last year have once again started to offer discounts, a sign the Bank of Japan’s (BOJ) attempts to reflate the economy are failing.

Fast Retailing (FRCOY) said it had not yet abandoned hopes of becoming the world’s biggest apparel retailer. The company has said it aims to open 100 Uniqlo stores in the United States, the world’s biggest clothing market, over the next few years.

But the brand has struggled in a crowded market where rivals such as Gap (GPS) are already well established, and where it faces price competition from fast-fashion brands such as H&M (HNNMY) and Inditex’s (ZTSTF) Zara.

 

The company said losses from Uniqlo’s operations in the U.S. market expanded in the past six months, partly due to costs related to closing some stores there.

Fast Retailing shares have fallen around 35% over the past year on worries about slower growth in Japan and difficulties expanding in the U.S. market.