By Rocky Swift
TOKYO (Reuters) -The Japanese operator of apparel retailer Uniqlo reported record third-quarter profit on Thursday and raised its full-year forecast as its business in China continued to recover from a pandemic slowdown.
Fast Retailing, known for its fleece jackets and inexpensive basics, has 925 Uniqlo outlets in mainland China - more than in Japan - making it a bellwether for a retail market that was hammered by tough COVID-19 restrictions in recent years.
The results pointed to a powerful return to form in China, the biggest overseas Uniqlo segment by far, but also a challenging market at home, where the yen's depreciation is eating into margins and consumers are highly resistant to price increases.
"Chinese consumer demand seems to be recovering strongly (after the COVID-19 crisis), as far as we can see," chief financial officer Takeshi Okazaki said at an earnings briefing.
Business in China started to turn around in the tail end of the second quarter and accelerated in the third, when existing stores in the mainland saw a 40% increase in sales. Okazaki said the company expects record performance in the region for the second half of the year.
Fast Retailing's operating profit in the three months through May surged 35% to 110.3 billion yen ($797 million), exceeding the 102.4 billion yen average of forecasts from seven analysts surveyed by Refinitiv.
The company raised its full-year profit forecast to 370 billion yen, also a new record, from 360 billion yen previously. Analysts had predicted 363 billion yen.
Fast Retailing's shares have soared 30% so far this year, helping founder Tadashi Yanai cement his place as Japan's richest person. The company's shares have outpaced a 24% advance in the benchmark Nikkei, which has been one of the hottest equity markets worldwide.
Fast Retailing is becoming the increasingly rare example of an overseas company doing well in China's mid-market apparel market, where several other Western names such as Forever 21 and several Inditex-owned brands have pulled out in recent years while others like Gap have struggled.
Among Uniqlo's chief rivals in China is Nanjiren, which similarly sells thermal clothing and underwear.
While China languished under lengthy pandemic curbs over the past couple of years, Fast Retailing put more focus on its North American and European operations. Those regions continued to perform strongly in the third quarter, the company said.
Uniqlo had 61 locations in North America as of February, and is adding four stores in the U.S. and two in Canada this summer as part of a plan to reach 200 by 2027.
In Japan, sales improved for the quarter, but profits were lower than expected as the weaker yen drove up the cost of goods. Prices for some items in Japan will have to go up, but they will be limited, Okazaki said.
"In Japan, it's still rather tough to raise prices," he said.
($1 = 138.8100 yen)