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Uniqlo, Zara and H&M; sales grow but profits under pressure

Catie Low

Global fast fashion brands Uniqlo, Zara and H&M; snared more than $600 million in sales from Australia's troubled discount department stores and local fashion chains last year but weird weather and the soft Australian dollar weighed on profitability.

The international apparel giants are poised to take more sales from the likes of Target and Big W this year but margins are under pressure, according to Macquarie Wealth Management and the sales per store rate is "dropping rapidly" as the shine comes off these global outfits.

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But the broker said this was unlikely to deter new international arrivals, keen to take advantage of shopper appetite for sharply priced, on-trend apparel - a trend that is adding to the pain for Australia's iconic discount department stores Target and Big W.

Macquarie identified Myer, Woolworths' Big W as well as Wesfarmers' Target as the businesses with the most to lose from any new international arrivals.

However, analysts from Macquarie said apparel specialists were also likely to find themselves between "a rock and hard place" as landlords reduced the space allocated to the sector and increased leases to internationals.

The dominant international brands are still driving sales through new store openings, with Uniqlo doubling the size of its network in 2016 with new stores in Chadstone, Chatswood and Brisbane.

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The Japanese fashion label and Zara accounted for about 6 per cent of apparel sales growth based on their 2016 performance or 0.9 per cent of cumulative clothing, accessories and department store sales in Australia and that doesn't even include H&M;'s sales, which doesn't release its financial results until later in 2017.

Macquarie says it expects H&M; to make a material impact on this number given it's big store expansion over the past year with analysts suggesting it full year sales ran past $200 million.

 

2015 sales at H&M;, Zara and Uniqlo totalled about $460 million, which equated to about 1.1 per cent of total clothing, accessory and department store sales in Australia over the same period according to the Australian Bureau of Statistics.

Uniqlo's sales grew by 247 per cent to $174.5 million in the full year to August as it reaped the benefits of six new store openings, taking its total store numbers to 12 in Australia however its losses for the same period blew out to $5.8 million up from $3.04 million a year earlier.

 

And the Japanese label's international network wasn't enough to protect it from Australia's unpredictable weather patterns last year, with its full year result to August revealing its gross margins, a key measure of profitability slipped by 547 basis points.

The Tokyo-based fashion phenomenon was forced to cut prices to move stock along with almost every other Australian apparel retailer last year as the unseasonably warm start to winter crimped sales along with the cool Spring conditions.

Broker Macquarie blames the margin deterioration at Uniqlo on the weakening of Australian dollar but it said currency on its own was not enough to explain the gross margin decline.

"It is likely the weak trading environment over the 2016 winter and spring in Australia has required Uniqlo to work the inventory harder with greater clearance activity," Macquarie Wealth Managements analysts said.

"Uniqlo's margins have now stepped down well below the lowest among the major internationals at just 53.4 per cent, a slide from 58.9 per cent in 2015

"We expect margin management to remain difficult  for the apparel retailers over 2017."

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