Li & Fung Says U.S. Orders Improving as Profit Gains 24%

Li & Fung Ltd. (494) said orders are picking up in the U.S., its biggest market, after the world’s largest supplier of clothes and toys to retailers reported a bigger-than-expected jump in 2011 profit. The stock surged.

Chief Executive Officer Bruce Rockowitz said customers in the U.S., where the company made 60 percent of its $20 billion revenue, are turning more optimistic. Li & Fung, a supplier of Wal-Mart Stores Inc. (WMT), yesterday reported net income rose 24 percent to $681 million, beating the average $635 million estimate of nine analysts surveyed by Bloomberg.

The results and improved outlook for the U.S. helped drive up shares of Li & Fung by 4.2 percent today to the highest in almost a year. The Hong Kong-based company increased earnings by acquiring rivals and entering supply agreements to sell American and European retailers consumer goods that are mostly made in Asian countries, such as China and Thailand.

The company sees opportunity to make more purchases in areas such as beauty and health care, Deputy Chairman William Fung said in an interview today.

“When things are not looking good in the world in general, it’s probably good for opportunities,” he said. “Our primary focus would be the markets we sell to, the US and Europe. Europe is not looking very good, there may be opportunities.”

Short Positions

The stock rose 4.2 percent to HK$19.86 at the close of Hong Kong trading today. It has gained 38 percent this year compared with a 12 percent gain for the benchmark Hang Seng Index.

“The results are pretty strong, much better than expected, resulting in a lot of investors covering their short positions,” said Andrew Sullivan, principal trader at Piper Jaffray.

Citigroup raised its rating on the stock to buy from neutral, citing improving margins. Acquisitions made in 2011 could add about 4 percent to 2012 revenue, analyst Eddie Lau said in a note to clients today.

Li & Fung signed 18 deals last year including 12 acquisitions for the group’s trading network and six for its distribution network, it said in a statement yesterday.

The company had cash and cash equivalents amounting to $426 million as of the end of 2011, it said. It proposed to pay a final dividend of 34 Hong Kong cents, compared with 26 cents a year earlier.

Improving Margins

Li & Fung has spent more than $3 billion on deals from 2006 to 2011, driving up both sales and profit in the five-year period, according to data compiled by Bloomberg.

Cost pressures are easing and margins are improving in the LF USA distribution business and the company’s average cost price is expected to “gradually trend down,” it said.

Li & Fung’s Wal-Mart division, started after a 2010 supply agreement, should turn profitable in 2012 after a “small loss” in 2011, Rockowitz said.

“You’ve seen incremental bullishness in the United States and orders are definitely better than last year from a growth point of view,” Rockowitz said at a press conference yesterday. “The U.S. is doing pretty well and overall the economy has improved dramatically year on year.”

Consumer sentiment has been fluctuating in the U.S., where Li & Fung supplies companies including Limited Brands Inc., Kohl’s Corp. (KSS) and Target Corp. (TGT)

Asia Sales

U.S. consumers poured into the malls and took to the Web during Thanksgiving weekend, spending a record $52.4 billion, the National Retail Federation said.

Sales at U.S. Wal-Mart stores open at least a year rose 1.5 percent in the fourth quarter ended Jan. 31, the second gain in the past 10 quarters. The fourth quarter is an important selling period for U.S. retailers because of the Christmas and Thanksgiving holidays.

Still, confidence among U.S. consumers unexpectedly dropped in March as higher gasoline prices threaten to squeeze household budgets.

Sales in Asia tripled to 12 percent, with China accounting for about half of revenue in the region, Li & Fung said. The company, which traces its beginnings to 1906, when parent Li & Fung Group was founded, may make 20 percent of its sales in Asia by the end of its three-year plan in 2013, Rockowitz said in August.

The purchase of Integrated Distribution Services Group Ltd., which distributes goods in Asian nations, including China, may help Li & Fung make more sales outside the U.S. The company cited the deal as the reason the percentage of sales made in the U.S. dropped to 60 percent from 65 percent in the previous year.

To contact the reporter on this story: Vinicy Chan in Hong Kong at vchan91@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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