Christmas Cheer Forecast by Wal-Mart Supplier Li & Fung Spurs Stock Rally

Christmas sales may match last year’s as retailers withstand “uneven” growth in the U.S. and Europe, said billionaire Victor Fung, chairman of the world’s biggest supplier of consumer goods.

“Perhaps the recovery rate is a little slower than what one had hoped for,” the chairman of the Li & Fung Group, whose listed unit supplies Wal-Mart Stores Inc. (WMT) and Macy’s Inc. (M), said in a Bloomberg interview. “The key thing is it is recovering.”

Li & Fung Ltd., which gets most of its sales in the U.S., rose 5.7 percent in Hong Kong trading today and was the biggest gainer on the benchmark Hang Seng Index. U.S. stocks gained yesterday as the government reported growth in factory orders that exceeded projections, while a private report showed American business activity topped forecasts.

“We still see overall retailing to be actually still recovering,” Fung, whose business group includes convenience stores, a toy retailer and a luxury clothing chain, said in the interview on Aug. 30. “Volumes in money terms will be quite steady.”

Comparable Sales Growth

Retailers on average will probably see same-store or comparable sales growth this year, said the billionaire. They are “accepting price increases and at the same time passing on some of that, very carefully, to customers,” Fung said.

Li & Fung Ltd. (494), which also supplies Inditex SA (ITX)’s Zara and Marks & Spencer Group Plc (MKS), traded at HK$14.84 as of the 4 p.m. close of trading in Hong Kong, the highest level in almost two months. The stock has gained 24 percent since Aug. 11, when it posted first-half profit that beat all analysts’ estimates.

“We’re more positive on Li & Fung to the extent they can still drive growth, particularly at Wal-Mart,” which entered a supply agreement with the outsourcer last year, Aaron Fischer, head of consumer research at CLSA Asia-Pacific Markets, said in by phone today.

“We still take a fairly cautious view of the retail environment in the U.S. and Europe,” said Fischer, who recommends buying Li & Fung’s stock. “If Li & Fung can increase penetration at Wal-Mart, this would offset any potential weakness in the general retail environment or with other customers.”

12,000 Factories

The Hong Kong-listed company supplies clients with 240 offices in 40 countries coordinating a network of 12,000 factories -- none of which it owns. About half of Li & Fung’s sourcing is still done in China while production in countries like Bangladesh, Indonesia and Turkey grows.

Toymakers at the China Import and Export Fair held earlier this year charged more to fill orders for Christmas, citing higher labor and materials costs as well as the yuan’s appreciation against the dollar. The event, which happens twice a year, is also referred to as the Canton trade fair.

Further price increases will be tempered as declining commodities costs offset rising wages, Fung said.

Cotton futures have plunged 27 percent this year, making it cheaper for the factories contracted by companies like Fung’s to make clothes. Cotton for December delivery fell 0.2 percent to $1.0557 a pound on ICE Futures U.S.in New York as of 3:30 p.m. Hong Kong time.

Japan’s Recovery

Crude oil, the source for chemicals used in toymaking, has declined 2.9 percent this year on the New York Mercantile Exchange after gaining 15 percent last year, according to data compiled by Bloomberg.

Li & Fung Group includes retailers such as Trinity Ltd. (891), a retailer of luxury clothing and shoes in China, South Korea and Southeast Asia. Trinity fell 0.4 percent to HK$8.07 and has slipped 1.5 percent this year, compared with a 10.6 percent drop in the Hang Seng Index.

Global demand may also be supported by Japan’s recovery, Fung said. “I still feel that the Japanese economy will be a growth driver for the world.”

Fung last month founded the Fung Global Institute, a think tank with Nobel laureate Michael Spence overseeing its research agenda.

He and his brother William Fung rank fifth on Forbes’ Hong Kong rich list, with an estimated combined wealth of $8.6 billion.

Among their group’s companies are Convenience Retail Asia Ltd., which operates 500 Circle K and Saint Honore stores in Hong Kong, Macau and southern China. Li & Fung Group’s Toys (Labuan) Holding Ltd. operates Toys “R” Us in the greater China region and Southeast Asia.

To contact the reporter on this story: Robyn Meredith in Hong Kong at rmeredith8@bloomberg.net

To contact the editor responsible for this story: Frank Longid at flongid@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.