(Bloomberg) -- Shares in Uniqlo owner Fast Retailing Co. headed for their biggest decline in five months over concerns about falling sales in Greater China, a region that generates more than a third of its operating profit.
The stock dropped as much as 7.8% in Tokyo trading, in line for its largest drop since Aug. 5.
Operating profit rose 7% to ¥157.6 billion ($996 million) for the three months ended November from a year earlier driven by strong demand in all markets but China, Fast Retailing said Thursday. Sales increased to an all-time high of ¥895.2 billion, largely in line with analyst estimates.
But analysts indicated concern over the company’s figures out of China, where sales declined 1% compared to a year earlier, their first contraction in eight quarters. Fast Retailing, which generated 37% of its operating profit from Greater China last fiscal year, is closing under-performing stores and revamping bigger and better-located outlets to drive sales.
“Although I had a neutral impression of the profit level, concerns about China overrode it,” Kuni Kanamori, an equities analyst at SMBC Nikko Securities Inc. wrote in a note Thursday. “Struggles in China used to be offset by other regions and even excess profit was generated. But expectations for overseas markets outside China are high now and that means there’s no longer any surplus.”
The company has been watching sales in China carefully over the past few months after comments by chairman Tadashi Yanai raised concerns about a possible fall in demand or boycott from consumers. Uniqlo does not source cotton from China’s Xinjiang region, where the US has restricted trade over human rights concerns, Yanai said in a BBC interview in November.
Weaker consumer spending and the warmer-than-expected weather so far in China were key reasons for the sluggish sales in the first quarter, Fast Retailing’s chief financial officer Takeshi Okazaki told analysts and reporters Thursday.
“In China, we’ve reached a stage where we can focus on market penetration rather than expansion as the market has grown,” he said. “I believe we can deliver results. I’m not worried about it in a medium term.”
The company kept its full-year forecast unchanged. Higher sales in North America, Europe and the Asia-Pacific region are expected to drive a 5.8% increase in the company’s operating profit to ¥530 billion for the fiscal year ending August from a year earlier, it said in October.
(Adding analyst comments.)
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