GO
Loading...

Is Fast Retailing getting too ambitious?

Fast Retailing is making a global expansion push, targeting the U.S. and China and potentially even acquiring U.S.-based J.Crew, but is the owner of the popular Uniqlo clothing brand moving too quickly?

Investors outside Japan might have some doubts about the Japanese retailer's plans. Fast Retailing's Hong Kong depositary receipts initially surged as much as 31.5 percent to 36.00 Hong Kong dollars from their HK$27.36 offering price on their trading debut Wednesday, but quickly retraced much of the gains to trade around HK$29.00 as short-term speculators took profit.

(Read more: From 5th Ave. to Oxford St., retail's global problem)

The Japan-listed shares may be pricey, trading at more than 34 times earnings, compared with Hennes & Mauritz at around 23 times and Inditex, the owner of the Zara brand, at around 25 times, according to data from Thomson Reuters.

But some analysts appear unfazed.

"The valuations are high," acknowledged Amir Anvarzadeh, head of Japan equity sales at BGC Securities. But he added, "It's a fantastically well-managed business. People are willing to pay that kind of premium for the aggressive expansion plans," he said, noting the company has no debt on its balance sheet.

(Read more: 5 things retail earnings tell us about the rest of the year)

The expansion plans are ambitious. The Japanese retailer currently has 260 locations in China and it plans to open around 100 stores a year – or one every three to four days – for the next few years. It's also making its first foray into the U.S. market since its failed attempt in the 1990s.

At the same time, media have reported the company is interested in acquiring JCrew for around $5 billion. Fast Retailing has an acquisitive history, with previous purchases including the Theory brand, Comptoir Des Cotonniers, lingerie maker Princesse Tam.Tam and J Brand.

(Read more: Don't bet on China's luxury spenders: Goldman)

"They're expanding fast, yes, but actually they can fund it easily through their own operating cash flow," said Makihiko Yamato, deputy head of research at SG-Ji.

Others have noted some concerns about the fast expansion, including the possibility the China market may become saturated.

Masafumi Shoda, head of consumer equity research at Nomura Securities, sees short-term risks to the rapid expansion in China, but he believes on a longer-term basis, the brand recognition will spur growth.

Toru Yamanaka | AFP | Getty Images

"The Chinese market is changing; it may be maturing. So that the luxury goods are now a downside risk, but the middle classes are still pointing to having spending power. That can be a very important building platform for the growth in greater China," Shoda told CNBC. The Uniqlo brand typically positions itself as affordable casual clothing.

Although the company failed at its initial attempt to enter the U.S. market, it is wading in again, with around 17 Uniqlo stores opened there so far. It is targeting $10 billion in sales there by 2020.

(Read more: Mistakes that can sink owners expanding overseas)

"Based on the failure in the past, they've been fairly conservatively observing the U.S. market in the past two years intensively," said Yamato said, noting the company's plans to open 10-20 stores a year there.

"This will be a big experiment and this will be a critical turning point for Uniqlo. If they do succeed this time in the U.S., I think they will become a true global SPA (specialty-retailer of private-label apparel)," he said.

Yamato also isn't very concerned about the potential J.Crew acquisition, believing the company won't overpay. Fast Retailing has walked away from acquisitions over price in the past, including an attempt to acquire Barneys.

While Yamato notes the $5 billion potential price tag for J.Crew might be expensive, "probably Fast Retailing may want to acquire the CEO, the management of J.Crew, who have a good reputation within the U.S. apparel industry."

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1