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As stores close, this retailer is doubling down

With a home market teetering on the verge of oversaturation, Japanese retailer Uniqlo is turning its attention to the U.S. to continue its growth story.

Surprisingly, it comes after nearly a decade in the United States and a store network that had only expanded to 20 locations during that time. Now, in the space of a year, the retailer will nearly double its presence to 38 locations.

A customer stands in front of a shirt display inside a Uniqlo store.
Krisztian Bocsi | Bloomberg | Getty Images
A customer stands in front of a shirt display inside a Uniqlo store.

It's the beginning of an expansion strategy that CEO Tadashi Yanai said earlier this year will ultimately lead to chains of 100 stores on both the East and West coasts, although the target is still moving.

It's also the latest move in parent company Fast Retailing's quest to become the world's top apparel retailer—which comes at a time when American shoppers are looking for new and exciting brands, with a particular interest in foreign companies such as H&M and Zara.

"I think that there's a lot of excitement over foreign brands," said David Birnbrey, chairman of retail real estate advisory group The Shopping Center Group. "[Uniqlo] has been extremely well received here."

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With retailers from Aeropostale to Sears looking to shutter a large number of stores—most recently with Sears' announcement on Wednesday morning that it may sell off its Canada business—Uniqlo is in a unique position, in that it has barely scratched the surface in the U.S. But those other retailers offer lessons both about expanding outside your home market and growing too fast within the U.S.

Larry Meyer, CEO of Uniqlo USA, called it "coincidental" that the company is entering the market as a major shift is underway in terms of retailers closing stores to better balance their bricks-and-mortar and online portfolios. But Birnbrey said it also gives Uniqlo a leg up.

"It allows them to see the mistakes that other people have made as they've expanded into the United States," he said.

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The shift also comes as Fast Retailing's sales have stalled in its native country but are gaining traction internationally, including in the United States. Although the company doesn't break out its U.S. sales figures, it said its international sales rose nearly 78 percent in the first half of fiscal 2014 helped by above-target results in the United States. Meanwhile, its sales in Japan rose less than 5 percent over the same period and were hurt by weak margins.

Meyer attributed the timing of the company's U.S. expansion to increased brand awareness in the country and an evolved product, which has significantly shifted from a decade ago. He pointed to the brand's HEATTECH line, which uses a fabric designed to keep the wearer warm, saying its clothes not only serve for fashion, but for function.

But despite the retailer's low prices on these items—made possible because of its massive scale of more than 1,300 stores worldwide—he also clarified that Uniqlo is not a fast-fashion retailer. Although people frequently make this mistake when describing the company, Meyer said Uniqlo works with longer lead times, and "there's a key product consistency to who we are," he said.

"We have good fashion but we're not about the latest fashion," he said, adding that the company differs from fast-fashion competitors in that it doesn't edit its entire assortment to adhere to the latest trends. He also cited a broader customer base, saying it's not just teens who shop at the stores.

Still, there are some things that concern Meyer about the company's expansion. The main challenge, he said, is finding the right team to keep the stores' execution up to the brand's standards. Uniqlo shoppers have likely observed its immaculately folded and hanging products, and the retailer trains store associates to sew and offers free hemming on pants priced over $20.

For Gene Spiegelman, vice chairman of Cushman & Wakefield's retail services, international retail group, the biggest challenge for retailers expanding their U.S. presence is finding the right location, particularly when scouting out malls. Spiegelman said specialty retailers aren't very interested in positioning themselves in malls that are not the top performers, which can be difficult given a lot of the store closings occur in tertiary shopping centers.

It also becomes more difficult given declining vacancy rates, which give landlords the power to charge higher rents.

The Shopping Center Group's Birnbrey said other challenges facing Uniqlo include finding the type of flagship locations the brand is used to for its off-mall locations (its Fifth Avenue store in New York is about 80,000 square feet) and balancing its physical footprint with its online presence.

"Every retailer is challenged by that," he said.

Forming an integrated shopping experience across online and in-store is another difficulty Uniqlo faces compared with its already established bricks-and-mortar competitors, Spiegelman said. Although many retailers are criticized for having store bases that are too large, these footprints give them an inherent advantage in that they can offer customers quicker distribution.

Meyer said Uniqlo is still in the early stages of developing its strategy for online and in-store, which currently operates through a distribution center on each coast.

Watching how this online strategy develops will ultimately determine how many stores the retailer opens in the U.S. market, Meyer said.

"The [store] mix that we will have in 2020 from where I sit today is different than the vision I had two years ago because of the growth of e-commerce," he said. "That combination will decide what the ultimate mix is."

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Still, one positive for the brand's online presence was the reaction its website received in the wake of the announced store openings. Meyer said that the brand saw a noticeable uptick in traffic to the site coming from each market as it was announced.

Its growing virtual popularity was also underscored by recent research at Jefferies, which found the Uniqlo site posted the second-highest growth among specialty retailers in unique visitors in April compared with the prior year, with 315,000 visitors.

"The Uniqlo brand is beginning to demonstrate an ability to transcend Eastern and Western cultures, a unique and powerful characteristic often associated more with European or American brands," ISI analyst Omar Saad wrote in a note to investors.

—By CNBC's Krystina Gustafson.

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