Previously we observed that when it comes to discretionary spending, if not so much staples, Japan's sales tax hike has been an absolute disaster, sending sales at some department stores such as Takashimaya plunging by 25% in the week since the April 1st roll out of the tax many think could unleash Japan's next recession.
Today we get some more on the ground perspective on the abysmal (second) reign of Abe, where the stock market may be approaching bear market territory (after everyone was convinced the Nikkei was set to soar in 2014), but it is really the economy which is about to get it, most likely resulting in Abe's second premature evacuation stage left (with the now traditional Imodium scapegoat) well before the work of Abenomics is completed, in the process sending the USDJPY once again back into double digit territory.
As Bloomberg reported overnight, Fast Retailing, Asia's largest clothing retailer was crushed in Friday trading, dropping 8% after it cut its profit forecast, citing higher costs and weak demand.
The company’s billionaire President Tadashi Yanai pared the profit outlook after spending more on salaries and expanding overseas, opening Uniqlo stores in New York, Paris, Shanghai and Jakarta to boost sales as a consumption tax increase begun April 1 in Japan damps demand. Costs for part-time workers, distribution and warehousing rose in the first half.
Fast Retailing’s net income dropped 15 percent to 23 billion yen in the second quarter ended February, as calculated from first-half earnings the company reported yesterday. Sales climbed 26 percent to 375.3 billion yen in the three-month period, while operating profit fell to 39.2 billion yen from 40 billion yen a year earlier, the company said.
The company’s operating margin slumped 23 percent from a year earlier to 10 percent in the second quarter, according to data compiled by Bloomberg. The margin was 17 percent in the second quarter of 2012, the data show. Operating income at the domestic Uniqlo business will probably be 100 billion yen this year, the company said yesterday, 13 percent less than previously forecast.
The reason for the margin collapse - Abe's much vaunted wages increase (which as we showed previously prevalently amounts to about Y1000 per month, or enough to buy 4 BigMacs).
Sales are expected to slow in the fiscal second half, while costs for labor, transportation and warehouses will increase, Chief Financial Officer Takeshi Okazaki said yesterday, without elaborating.
The retailer said last month it plans to change 16,000 part-timers’ contracts at Uniqlo in Japan to full time to maintain a stable workforce.
“The rising labor cost concerns me a little,” said Takashi Aoki, a Tokyo-based fund manager at Mizuho Asset Management Co.
Surely Fast at least benefited from surge spending ahead of the April 1 tax hike? Nope.
A last-minute surge in sales before the tax increase failed to materialize, the company said yesterday.
So an 8% correction should at least make the stock cheap? Wrong again.
Fast Retailing’s price fell to about 37 times estimated earnings per share, still the highest multiple among the 10 largest global apparel retailers, according to data compiled by Bloomberg.
“The multiple is just too high” for Fast Retailing, Dairo Murata, an analyst at JPMorgan Securities Japan Co. said by phone today. He rates the shares neutral, the equivalent of hold.
What about the broader economy:
A gauge of economic expectations of people such as taxi drivers and restaurant workers tumbled to 34.7 in March from 40 a month earlier, according to the Economy Watchers survey released April 8 by the Cabinet Office in Tokyo.
The bottom line: “I don’t have an optimistic view about consumption in Japan,” Yanai told reporters yesterday in Tokyo. He said he had yet to see an effect on sales from the tax increase. He will quite soon, and he won't be happy with what he sees.
And as Bloomberg conveniently points out what we started with, "The last time Japan increased the consumption levy, in 1997, the economy fell into recession." This time won't be different.
Bottom line: non-core prices soaring courtesy of Japan's QE crushing discretionary purchases even as stocks - that much vaunted "wealth effect" transmission mechanism about to enter a bear market, slammed corporate margins meaning CEOs are about to once again lower salaries after having followed Abe's misguided directive to boost wages, and an economy that is about to recontract and resume its recessionary status quo, even as the BOJ is set to hold Japan's entire GDP on its balance sheet in as little as two years.
All of the above leads us to conclude that someone simply mistook a p for a b in Abenomics.