TOKYO, Japan — No-frills fashion. Cheap and cheerful. Call it what you will, Shimamura Co. has a money-making formula for selling clothes in Japan's moribund economy.

Growth in operating income at the country’s second-largest clothing chain has outpaced bigger rival Uniqlo-owner, Fast Retailing Co., for the past five quarters. The reason may come down to the 63-year-old retailer’s simple approach.

Shimamura employs no fashion designers or celebrity models. Most of its 2,000 outlets are in residential neighbourhoods, rather than on upscale shopping strips. Its merchandise — including 1,140 yen ($10) cardigans and 900-yen skinny pants — are mainly sourced from low-cost manufacturers overseas.

“We don’t gamble, we only go into what we are certain we can win, and do what we understand,” President Masato Nonaka, 56, said in an interview at Shimamura’s headquarters in Saitama prefecture, about 20 miles (32 kilometres) north of Tokyo. “That is the fundamental policy of our company.”

That code has been especially successful in helping the company expand sales in Japan even as household spending fell in 11 of the past 12 months ended September and consumer prices fell for a seventh straight month. By appealing to thrifty housewives, Shimamura’s stock has outperformed both the benchmark Topix index and Fast Retailing over the past year.

Revenue increased an average of 6.2 percent the past three quarters, beating the 5.4 percent average of Fast Retailing, whose annual sales are three times larger. The retail giant's billionaire chairman Tadashi Yanai is pledging a shift to "lowest possible prices" for its Uniqlo casual-wear stores, and has turned to lower-priced brand GU as his company's second pillar of growth.

Fast fashion chains that target younger customers are facing challenges in Japan as the population ages, while rising data costs for mobile phone-totting teenagers means they have less money to splurge on fashion, said Nonaka, who has been with Shimamura for more than 30 years. “But a company like us selling goods at low cost is impacted less,” he said.

Shimamura opened its first Tokyo store in 1978, a quarter century after it started in Saitama prefecture in 1953. The retailer added more stores throughout Japan from 1990 and had 2,000 Shimamura and other branded outlets by the end of 2015.

That expansion has taken Shimamura’s share of Japan’s apparel market to 4 percent, eclipsing World Co. in 2011, but still trailing Fast Retailing’s 12 percent, according to Euromonitor International.

“Fast Retailing is way beyond us, like above the clouds, and we are just an ordinary company,” said Nonaka. “We won’t be able to copy them. We have to operate our own way.”

Shimamura’s net income surged 46 percent to 16.7 billion yen in the six months ended Aug. 20, beating its own guidance of 14.8 billion yen, the company said on Oct. 3. It reiterated a forecast for full-year operating profit of 46.2 billion yen, a 15.8 percent jump from a year earlier.

Earnings have been helped by a stronger yen, which makes it cheaper for Japanese companies to buy good overseas. The yen strengthened against all major Asian currencies this year and is up 15 percent against China’s yuan.

Of 13 analysts who rate the stock tracked by Bloomberg, five recommend buying Shimamura shares, versus two with a sell rating. The remainder, including JP Morgan Securities analyst Dairo Murata, suggest holding.

Investors and analysts have noted the stark contrasts between Shimamura and its rival, Uniqlo.

“They are totally different,” Murata said in an interview. “They are different in what they have done in the past, and what they trying to do in the future. While Uniqlo has a large portion of its sales overseas, Shimamura is mainly domestic.”

Store Closures

Two years ago, Shimamura computerised its stock management and inventory systems, and now relies more on algorithms to determine discounts on merchandise. Still, the company has no e-commerce presence and its dozen or so outlets in China have struggled since they opened over the past four years due to a lack of brand recognition.

In contrast, Uniqlo has stepped up its expansion overseas, growing to 958 international stores including 472 in mainland China as of end-August.

“We are struggling in China, we don’t have brand power,” Nonaka said. “We will close down those stores that aren’t working. I’ve already identified those that are losing the most money.”

Instead, Shimamura is looking to acquire businesses in product categories where the chain is lacking. “But we would like to avoid risk as much as we can to expand our business,” said Nonaka. His company bought retailers Tawaraya Co. and Avail Co. in 2009, according to data compiled by Bloomberg.

Meantime, Shimamura is enjoying a pickup in sales after the end of a prolonged summer, Nonaka said.

“It’s like sales are on fire,” he said. “I’ll probably only say it’s been ‘good,’ but the truth is that we’re selling so well that I cannot stop smiling.”

By Grace Huang; editors: K. Oanh Ha, Yusuke Miyazawa, Daryl Loo and Jason Gale.

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