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Uniqlo owner has too much cash insulation

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Fast Retailing is heating up. First-quarter figures offer fresh confirmation of the turnaround at the Japanese retailer behind Uniqlo - and show all those reasonably priced puffer jackets and light weight sweaters have generated a cash pile that now exceeds US$7 billion.

[HONG KONG] Fast Retailing is heating up. First-quarter figures offer fresh confirmation of the turnaround at the Japanese retailer behind Uniqlo - and show all those reasonably priced puffer jackets and light weight sweaters have generated a cash pile that now exceeds US$7 billion. If Fast Retailing does not share more of the wealth, troublemakers could emerge, however.

There was a lot to like in Thursday's results. Crucially, problems have been ironed out at Uniqlo International, which now outsells its Japanese counterpart and is almost as profitable: operating margins, at 18.1 per cent, are now just three percentage points below Uniqlo Japan.

For any prospective investors, much of the good news is already priced in. Three months ago, Fast Retailing was valued attractively compared to Zara's parent, Inditex. But with the Japanese stock up 35 per cent since, and shares in the Spanish giant dipping, the tables have turned as at Thursday's close, Fast Retailing fetched 16.5 times forecast Ebitda versus 14 times for its rival.

Another puzzler is that Fast Retailing now reports 789 billion yen(S$9.4 billion) of cash and equivalents, up 69 per cent in a year. Retail is fickle and competitive, and Fast Retailing plans to invest more in online services and logistics. So a little hoarding can be excused. And like most entrepreneurs, founder Tadashi Yanai probably values the independence from banks this war chest offers.

Nor is Fast Retailing exceptional. Corporate Japan is ridiculously flush. Cash holdings at Tokyo-listed companies total 140 per cent of national GDP (gross domestic product) , according to Jesper Koll, the head of WisdomTree in Japan - more than three times the US ratio.

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Still, this makes a promised annual dividend totalling about 37 billion yen look stingy. And the cash pile matches the US$5.9 billion amassed by Inditex and the US$1.2 billion at H&M put together, according to the most recent results for the pair.

Solid companies with conservative balance sheets have become targets for shareholder activists. And Japan is no longer immune. Fast Retailing might want to think about handing some of this extra padding back via buybacks or special dividends, or it could come under pressure to peel off the layers.

Fast Retailing on Jan 11 reported better-than-expected quarterly results for the three months to end-November, aided by improvements in its main overseas business.

The Japanese retailer said earnings rose 12.7 per cent to 78.5 billion yen, compared to the same period a year earlier, on sales up 16.7 per cent to 617 billion yen. Operating profit leapt 28.6 per cent to 114 billion yen. All three figures were ahead of consensus analyst estimates, according to figures compiled by Thomson Reuters.

Fast Retailing shares leapt to their highest in more than three years. By late morning in Tokyo on Jan. 12, they stood 5.7 per cent higher at 49,450 yen.

REUTERS

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