UPDATE 2-Fast Retailing cuts net profit forecast on high-end denim woes

Thu Jul 10, 2014 6:10am EDT

* Possible impairment loss on J Brand denim label

* Progress on J Brand sought by next year - CFO

* Q3 operating pft 33 bln yen, Uniqlo sales boost (Adds executive comments, details on strategy)

By Chang-Ran Kim

TOKYO, July 10 (Reuters) - Japanese apparel supplier Fast Retailing Co cut its full-year net profit forecast more than 10 percent to account for losses at a premium denim brand, even as strong sales in its flagship Uniqlo stores helped third-quarter operating profit grow 21 percent, in line with forecasts.

Asia's biggest fashion retailer cut its full-year net profit target on Thursday to 78 billion yen ($768 million), down from 88 billion yen, to account for a possible 10 billion yen impairment loss on its J Brand U.S. jeans operation. Fast Retailing paid $290 million to buy an 80 percent stake in J Brand late in 2012, with label managers holding on to the remaining stake.

"We weren't effective enough in competing in the increasingly tough premium denim market," Chief Financial Officer Takeshi Okazaki told a news conference in Tokyo.

The persistent loss at J Brand highlights the potential risks of scooping up non-homegrown brands for Fast Retailing in its drive for international growth. Ambitious chief executive Tadashi Yanai has a long-standing goal to make Fast Retailing, which also includes trendy labels like Theory and Comptoir des Cotonniers, the world's biggest apparel retailer by sales by 2020.

For the March-May fiscal third quarter, operating profit rose to 33.0 billion yen ($325.09 million), just above an average estimate of 31.23 billion yen in a poll of five analysts by Thomson Reuters I/B/E/S.

Sales jumped 19.4 percent in the quarter to 323.6 billion yen, while net profit fell 11.7 percent to 20.2 billion yen, squeezed by foreign exchange losses. The new net full-year profit forecast means the company would book a net loss for the fourth quarter alone.

Fast Retailing in May assigned Theory chief executive Andrew Rosen to also oversee J Brand, replacing the brand's founder and former CEO Jeff Rudes, who resigned. "We hope to be able to talk about some progress next fiscal year," Okazaki said.

Fast Retailing kept its annual operating profit forecast for the year ending on Aug. 31 unchanged at 145.5 billion yen, having cut the guidance by 7 percent in April. Making that target would represent a 9.5 percent rise on the year for Fast Retailing.

Fast Retailing posted a 71 percent rise in overseas sales at its flagship Uniqlo chain, which is making steady progress expanding its presence abroad to compete with global clothing retailers such as Sweden's Hennes & Mauritz AB (H&M) and the Zara chain operated by Spain's Industria de Diseno Textil SA (Inditex).

But Uniqlo faces rising costs at home as a weaker yen raises the cost of imports while global textile materials prices climb. Uniqlo books just over half of its sales in Japan.

Known in Japan for its affordable but high-quality clothes, Uniqlo is taking the unusual step of raising prices, by around 5 percent, from the fall/winter collection this year in Japan to offset higher costs.

But it faces a further rise in costs over the next several years as it aims to hire about 16,000 regular staff to stem high turnover among part-time workers in Japan's tight labour market. Fast Retailing has said that, in the longer term, labour costs should fall as a stable workforce boosts efficiency and the cost of training new staff diminishes.

The company's shares, the most heavily weighted in Tokyo's benchmark Nikkei average, have fallen by nearly a quarter since the start of the year, more than three times the Nikkei's nearly 7 percent drop. Fast Retailing ended up 0.8 percent at 33,505 yen before the earnings release, compared with the Nikkei's 0.6 percent drop.

($1 = 101.5100 Japanese Yen) (Reporting by Chang-Ran Kim; Editing by Kenneth Maxwell)