How Uniqlo is Using Slow Sales to Clean Up its Business

Last Updated Oct 12, 2010 2:41 PM EDT

Uniqlo, owned by Fast Retailing, is sort of hitting the skids after four years of strong growth. Japan's biggest clothing operator forecast full-year profit will fall 17 percent to 51 billion yen for the fiscal year through August 2011. Uniqlo's taken hits on nearly every front from the cost of raw goods, to unusually warm temperatures and an assortment that turned out to be too fashion forward for devotees of the chain's streamlined basics. But don't expect to find managers hand-wringing and fretting. Uniqlo's already implementing major changes.

Fast Retailing chairman (and biggest shareholder) Tadashi Yanai admitted that the company's collective head was turned by the allure of offering more on-trend items for the spring-summer season. Big mistake. Especially as Japanese consumers held even more tightly to their wallets. No matter. Yanai made a swift about-face. "We will strengthen our basic lines. We were driven by 'surface fashion' too much. A meaningless design such as a shirt with a frill attached in a meaningless part." While the design team goes back to the basics at the drawing board, he said the company is working to correct its planning and production problems, too.

Such frippery as those shirt ruffles was much more than meaningless embellishment â€" it was also ubiquitous. For every one tortured textile (same design in 25 colors!) Uniqlo trotted out in its attempt to get a leg up in the style game, there were several dozen more variations available at the likes of Forever 21, H&M and Zara. And those competitors all have much more experience whipping covetous fashionistas into the kind of froth to buy into frivolous trends. The result, Fast Retailing is going back to its own sand(er) box â€" literally â€" continuing to develop its +J collaboration with minimalist design guru Jil Sander. It's also in the process of killing off five of its small women's apparel brands including Zazie and Enraciné. That's going to hurt, but Fast Retailing is willing to bite loss of 3 billion yen (about $34 million) for the fiscal year in order to make way for 2011's profits.

Comps were down in August and slid further down 24.7 percent in September, thanks to record heat right at the time Uniqlo's coziest threads were hitting the racks. One of Fast Retailing's claims to fame during the recession was its collection of well-priced but relatively high-quality thermals and fleeces under the Heattech label. But once the chill sets in, Fast Retailing fully expects things to heat up at the registers. By keeping the currently languishing apparel in the stores without discounting, Fast Retailing forecasts sales of Heattech items will rise 40 percent to 70 million units in the current fiscal year.

Despite the momentary pall on profits, Yanai and company are still in expansion mode. The chain opened 42 more stores across Asia which boosted overseas revenue overseas a hefty 92.6 percent to 72.7 billion yen which amounts to a 33.2 percent increase in profits. Yanai's still got his eye on China, and says he's on track to open 1,000 stores in the next decade (he's got 54 so far). In addition to store openings, Yanai says Fast Retailing could spend up to Y1 trillion on a shopping spree to buy up other companies. He told the WSJ,

If there is a change, we would like to look into an M&A as a way to expand in Europe and the U.S, and we would also like to take advantage of the strong yen. But our priority is to become No. 1 in the world by ourselves.

Image via Uniqlo