Fast Retailing: Consider Both Results Beat And Slower Growth Outlook

seekingalpha10-17

I continue to rate Fast Retailing stock as a Hold after assessing the company's FY 2024 performance and FY 2025 prospects.FRCOY's FY 2024 revenue and operating income came in above expectations due to...

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Ltd.","start_time":0,"source_url":"https://seekingalpha.com/article/4727334-fast-retailing-consider-both-results-beat-and-slower-growth-outlook","article_id":"2476108955","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1877135143/image_1877135143.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2476108955","pubTimestamp":1729176184,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"I continue to rate Fast Retailing stock as a Hold after assessing the company's FY 2024 performance and FY 2025 prospects.FRCOY's FY 2024 revenue and operating income came in above expectations due to","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"FRCOY":"Fast Retailing Co. Ltd.","BK4094":"服装零售","FRCOF":"Fast Retailing Co. Ltd."},"translate_title":"迅销：同时考虑业绩增长和增长前景放缓","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"FRCOF":0.9,"FRCOY":0.9},"content_text":"I continue to rate Fast Retailing stock as a Hold after assessing the company's FY 2024 performance and FY 2025 prospects.FRCOY's FY 2024 revenue and operating income came in above expectations due to the UNIQLO Japan segment's product tweaks and operating efficiency improvement.But the company's FY 2025 outlook points to slower top line and operating profit expansion, which, I think, is attributable to its recruitment efforts and store footprint optimization initiatives.   Kokkai Ng/iStock Unreleased via Getty ImagesMy rating for Fast Retailing Co., Ltd. (OTCPK:FRCOY) (OTCPK:FRCOF) [9983:JP] is still a Hold. FRCOY's FY 2024 (YE August 31, 2024) financial results surpassed the market's expectations, as its UNIQLO Japan segment's product portfolio tweaks and efficiency improvement efforts paid off. However, Fast Retailing is anticipating revenue and operating income growth deceleration for FY 2025, which I attribute to the company's store network optimization initiatives and an increase in human talent investments. There are positive read-throughs from Fast Retailing's FY 2024 results relating to product management and operating efficiency, but FRCOY's FY 2025 performance is expected to be impacted by higher staff costs and selected outlet closures. As such, I stick to my existing Hold rating for FRCOY. I previously analyzed FRCOY's business operations in Greater China and its home market Japan with my May 18, 2024 initiation piece. The company's shares can be traded on the Japanese equity market and the OTC (Over-The-Counter market). Fast Retailing's Japanese shares and OTC shares boasted mean daily trading values of around $600 million and $1.4 million, respectively for the past 10 trading days according to data sourced from S&P Capital IQ. US brokerages like Interactive Brokers offer trading services for Japan-listed shares. FRCOY's FY 2024 Revenue And Operating Income Exceeded Expectations Late last week on October 10, Fast Retailing issued an announcement revealing the company's financial performance for the most recent fiscal year ended August 31, 2024 or FY 2024. FRCOY's actual top line and operating profit for FY 2024 were better than what the market had anticipated. Revenue for Fast Retailing increased by +12.2% to JPY 3,103.8 billion in the latest fiscal year. The company's FY 2024 top line came in +1.1% higher than the sell side's consensus forecast of JPY 3,068.7 billion as per S&P Capital IQ data. The turnaround of FRCOY's UNIQLO Japan business segment in the second half of fiscal 2024 was the major factor contributing to the company's revenue beat. The UNIQLO Japan segment registered a revenue growth of +13.1% YoY for 2H FY 2024, which represented a significant reversal from this business' -2.0% YoY sales contraction in 1H FY 2024. On May 18, 2024 initiation article, I highlighted that Fast Retailing's Q2 FY 2024 sales in the Japanese market were affected by \"hotter-than-expected weather.\" FRCOY noted in its FY 2024 results announcement that the UNIQLO Japan made \"efforts to accurately capture customer demand by maintaining strategic inventory of core summer ranges through the end of the summer season.\" In other words, Fast Retailing managed to tweak its product offerings for UNIQLO Japan to engineer a turnaround of this business segment in 2H FY 2024, and this drove a FY 2024 top line beat for FRCOY. On the other hand, FRCOY's FY 2024 operating income and net profit beat the analysts' consensus estimates by +4.6% and +4.3%, respectively, based on S&P Capital IQ data. This is more significant than Fast Retailing's +1.1% revenue beat, which implies that profitability improvement was the main reason for the company's above-expectations earnings. The company's operating profit and net income attributable to shareholders grew by +31.4% and +25.6% to JPY 500.9 billion and JPY 371.9 billion, respectively for FY 2024. In the latest fiscal year, FRCOY's operating margin and net margin expanded by approximately +230 basis points and +130 basis points, respectively. Fast Retailing's better than-expected operating income and net profit for fiscal 2024 were largely driven by an increase in operating efficiency and favorable operating leverage effects for its UNIQLO Japan segment. The UNIQLO Japan business' operating margin increased by +350 basis points from 13.2% for FY 2023 to 16.7% in FY 2024. With regard to operating efficiency, FRCOY indicated in its FY 2024 results announcement that \"successful efforts to ensure production orders closely reflected latest sales trends\" led to \"improving cost of sales\" and a lower \"discounting rate\" for UNIQLO Japan. This means that Fast Retailing's UNIQLO Japan business became more efficient in managing its manufacturing operations. Separately, the UNIQLO Japan segment's SG&A (Selling, General & Administrative) costs-to-revenue metric decreased by -50 basis points in FY 2024 which Fast Retailing attributed to \"strong sales\" in its results announcement. This suggests that the decline in UNIQLO Japan business' SG&A costs-to-sales ratio was driven by positive operating leverage. Fast Retailing's Japan-listed shares with the 9983:JP ticker symbol and its OTC shares with the FRCOY ticker symbol rose by +4.3% and +4.9%, respectively, in the past one week following its FY 2024 results announcement. Fast Retailing's post-earnings announcement share price outperformance is justified by the company's FY 2024 results beat. But Fast Retailing Is Expected To Grow At A Slower Pace In FY 2025 FRCOY disclosed the company's financial guidance for the new fiscal year or FY 2025 (YE August 31, 2025) in tandem with its FY 2024 results announcement. The company is anticipating that its growth in revenue and operating income will slow in FY 2025. Fast Retailing is guiding for its headline revenue and operating profit to grow by +9.5% and +5.8% to JPY 3,400 billion and JPY 530 billion, respectively in FY 2025. On a constant currency basis, FRCOY's FY 2025 outlook translates into expectations of a +10.9% increase in top line and a +7.6% expansion in operating income for the new fiscal year, as indicated in its earnings presentation. As a comparison, Fast Retailing's actual top line and operating profit rose at a comparatively faster rate by +12.2% and +34.1%, respectively in the prior fiscal year. More significantly, FRCOY's expected +7.6% constant currency operating profit expansion will be the company's slowest pace of operating income growth since the COVID-19 pandemic. As a reference, the company's operating income increased by +25.4%, +66.7%, +19.4%, +28.2% for FY 2020, FY 2021, FY 2022, and FY 2023, respectively. As mentioned above, Fast Retailing achieved an impressive +34.1% operating profit growth in FY 2024. I take the view that the expected moderation in revenue growth for Fast Retailing in FY 2025 is attributable to the company's \"scrap and build approach\" for selected markets. At the Q&A session for the company's FY 2024 results briefing, Fast Retailing mentioned that it will be \"closing smaller stores or stores in less favorable locations and opening bigger stores in better locations\" in Greater China and Southeast Asia as part of the \"scrap and build approach.\" FRCOY is targeting gross new store openings of 60 and 30 for Greater China and Southeast Asia, respectively, in FY 2025, which doesn't take into account the potential shutting down of certain stores in these regions. It is good that FRCOY is making tweaks to its store footprint in certain markets to improve the overall quality of its store network. But this potentially comes at the expense of slower net store openings, which explains why Fast Retailing is anticipating revenue growth deceleration for FY 2025. In terms of profitability, Fast Retailing's FY 2025 guidance implies that its operating margin and net margin will decline by roughly -50 basis points and -70 basis points to 15.6% and 11.3%, respectively in the new fiscal year. It is reasonable to assume that a potential increase in staff costs could be a drag on FRCOY's FY 2025 profit margins. The company stressed at its FY 2024 earnings briefing that it has to \"build a pool of talented human resources and teams in every region.\" In its FY 2024 earnings presentation, Fast Retailing emphasized that it will \"strengthen investment in human capital\" and indicated that the company will \"actively recruit talent on a global scale.\" Having a team of capable employees to support the company's future growth is the right thing to do for Fast Retailing. However, it is inevitable that FRCOY's profitability will take a hit from higher staff expenses in the near term, before the investments in talent translate into an increase in sales and earnings for the mid-to-long term. In summary, Fast Retailing's financial performance for FY 2025 is expected to be inferior to that for FY 2024, which will limit the stock's re-rating potential. Conclusion There are both positive and negative takeaways from Fast Retailing's recent disclosures. FRCOY's ability to tweak its product offerings and enhance operating efficiency for its UNIQLO Japan business allowed the company to report above-expectations FY 2024 results. On the other hand, Fast Retailing's focus on enhancing the overall quality of its store footprint and hiring the best talent is likely to hurt the company's short-term top line and operating profitability. With respect to valuations, I see Fast Retailing stock as fairly valued at best. In my May 18, 2024 initiation piece, I highlighted that FRCOY has good \"growth potential in international markets outside of Japan\" and is deserving of a \"valuation premium.\" But Fast Retailing is already trading at a consensus forward one fiscal year P/E multiple of approximately 40 times as per S&P Capital IQ data. As a comparison, the market currently values Industria de Diseño Textil, S.A. (OTCPK:IDEXY)(OTCPK:IDEXF) [ITX:SM] or Inditex at a consensus forward P/E of around 30 times. FRCOY already enjoys a 33% valuation premium over its peer, so it is hard to make a case for Fast Retailing's undervaluation. Therefore, I maintain my Hold rating for Fast Retailing, considering the company's recent results, forward-looking guidance, and valuations.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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