Fast Retailing's Drive to Bag Barneys

The Japanese retailer is determined to snare the U.S. chain, but investors aren't convinced overseas expansion is a smart strategy

by Kenji Hall

• View Slide Show

Can Fast Retailing's overseas buying binge win over the skeptics? On Aug. 5, the Japanese retailer, which owns the Uniqlo clothing chain, upped the ante in an escalating bidding war for Barneys of New York, offering $950 million. That was $50 million more than Dubai-based investment fund Istithmar had bid earlier in the day and marked the second time in a month that Fast Retailing pushed up the price. Istithmar, which had been on the verge of buying Barneys last month, now has just two business days to respond to Jones Apparel Group (JNY), the owner of Barneys.

Bagging Barneys would seem a major coup for Fast Retailing CEO and President Tadashi Yanai. He has tied the company's future to a rapid overseas expansion that would double annual revenues to $8.5 billion by 2010. With Barneys, Yanai would edge closer to his target while adding a coveted higher-margin luxury line to a company best known for its cheap and cheerful Uniqlo shops.

Though Jones Apparel doesn't disclose Barneys' earnings, Goldman Sachs (GS) has estimated that the retailer's operating profits could rise 21%, to $58.3 million, this year on a 25% jump in sales, to $720 million. (Goldman Sachs stopped issuing stock reports on Fast Retailing after being hired as an adviser by Jones Apparel.)

Lack of Synergies

But judging by the steady decline of Fast Retailing's shares, Yanai's plan hasn't won over many investors yet. Since January, the stock has dropped 42%, compared with a 2% decline in the benchmark Nikkei-225 Stock Average, wiping out nearly $4.5 billion of the company's market value. And while the company has stepped up its efforts to acquire Barneys, its share price has remained weak and is now hovering near a two-year low. At the Tokyo Stock Exchange on Aug. 6, it ended the day 2.5% lower.

One reason for analysts' and investors' doubts: the lack of synergies between the mass-market Uniqlo brand and Barneys. Buying a luxury U.S. brand would certainly lift Fast Retailing's overall sales, the highest of any apparel retailer in Asia. And it has plenty in its war chest to afford such a pricey acquisition—some $1.16 billion in cash at the end of May. But it's not clear whether adding Barneys would do much to recharge the Uniqlo brand that is the basis for the company's fortunes. Linking the two might even hurt Barneys' image as a high-end retailer, undoing much of what Jones Apparel has accomplished since buying the brand for $400 million in 2004.

Some analysts are advising caution. Just last week, Credit Suisse's (CS) Dairo Murata slashed his profit forecasts and lowered his target stock price for Fast Retailing, citing weak sales mainly at Uniqlo's 700-plus domestic outlets. Also last week, the company said domestic same-store sales, a closely watched retail barometer that measures sales of stores open a year or more, fell in July by 11.7%, marking the third consecutive month of declines after a spell of rainy weather kept shoppers away during a normally high-turnover three-day holiday weekend.

Overseas Outlook

Murata now thinks the company's operating profit will slide 3.1%, to $580 million, in the fiscal year through August despite a 17% jump in sales, to $4.47 billion. That's even lower than the company's own forecasts, which were lowered last month, to $613 million in operating profit (up 2.6%) on sales of $4.55 billion (up 19%).

The one silver lining in Fast Retailing's courtship of Barneys is that it would give the Japanese retailer a more secure toehold in a major overseas market. Despite the much-ballyhooed opening of the flagship Uniqlo store in New York last November and another spacious shop in China in December, the company's strategy of building mega-stores targeting the designer crowd hasn't brought the results it had hoped for, and sales at its 41 overseas stores are mixed. U.S. operations alone are expected to post a multimillion-dollar operating loss in the year through Aug. 31, despite an expected quadrupling of sales, analysts say. (Uniqlo accounts for a big chunk of Fast Retailing's earnings, but not all of it; the company's 1,800 shops in 12 countries also sell other apparel brands, such as Comptoir des Cotonniers, Princesse tam.tam, and Theory.)

Of course, you wouldn't want to write off Yanai. The retailing giant is sure to be studying lots of other options. On the operations side, Fast Retailing might teach Barneys' management, which is expected to stay on, a thing or two about forging into new markets. Yanai might also ask Barneys' executives for help overhauling Uniqlo's utilitarian casual look to appeal to a more fashionable crowd in the U.S. The common denominator in both of those strategies is the big spending and risks they carry. That's why it could be some time before strong results prompt investors to bid up Fast Retailing's shares.

Hall is BusinessWeek's technology correspondent in Tokyo
.