Uniqlo owner blames warm winter for profit fall, predicts tough second quarter

By Ritsuko Ando

TOKYO (Reuters) - Fast Retailing Co Ltd, the owner of Uniqlo, posted a surprise drop in profit as unseasonably warm weather hit sales of winter clothes, and outlined a tough second quarter as it offloads the inventory at a discount.

The bleak results come at a time when Uniqlo - known for its simple and affordable clothes such as lightweight down jackets - is battling saturation in its main home market, Japan. There are also worries it could come under pressure due to a slowdown in China, where it typically logs a major proportion of its growth.

Operating profit at Uniqlo's Japan business, which accounts for more than a third of Fast Retailing's operating profit, fell 30 percent in the first quarter from the same period a year ago.

"We did extremely well domestically and ran out of stock on winter clothing in the previous year, so we went into this season with extra," Chief Financial Officer Takeshi Okazaki said. "As a result, we were hit squarely by the mild weather."

The retailer's overall operating profit fell 8 percent to 104.7 billion yen ($970.16 million) over September-November.

That compared with an average estimate for a 3.5 percent rise to 118 billion yen from four analysts, according to I/B/E/S data from Refinitiv.

The domestic business is expected to record a larger-than-expected decline in profit in the first half due to the discounting, Fast Retailing said in a statement https://www.fastretailing.com/eng/ir/library/pdf/fr_ir_e_n20190110_1q_summary.pdf.

The company also said it will increase discounting in Greater China and South Korea to offload winter inventory.

However, it expects its Uniqlo international business to rake in strong first-half revenue and profit growth. Operating profit for the business jumped 12.6 percent in the reported quarter, boosted by a double-digit growth in China.

BETTER NEXT HALF

Fast Retailing said it sees Japan Uniqlo profit rising sharply in the second half of the year on strong cost controls.

It also shrugged off concerns of a slowing economy in China.

"I believe Chinese economic growth is slowing down but it's not showing an impact as far as our business is concerned," Okazaki said, adding that he remained on alert.

(For an interactive graphic on Uniqlo's Chinese expansion, click https://tmsnrt.rs/2RKQxje)

The firm opened a net 78 stores in China in the last fiscal year, expanding to 633 locations, while it closed a net 4 stores in Japan, ending the year with 827 stores. But analysts have been concerned how long growth momentum in China would last.

Economic growth in China is widely expected to slow due in part to the impact of a trade war with the United States. On Tuesday, state television CCTV reported that Beijing plans to introduce policies to boost domestic spending.

Fast Retailing kept its operating profit forecast for the full year through August 2019 unchanged at 270 billion yen.

($1 = 107.9200 yen)

(Reporting by Ritsuko Ando and Yoshiyasu Shida in Tokyo and Sayantani Ghosh in Singapore; Editing by Christopher Cushing and Himani Sarkar)