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Li & Fung Climbs After First-Half Profit Beats All Estimates

Li & Fung Ltd. Chief Executive Officer Bruce Rockowitz
Bruce Rockowitz, group president and chief executive officer of Li & Fung Ltd. Photographer: Jerome Favre/Bloomberg

Li & Fung Ltd., the world’s biggest supplier of clothes and toys to retailers including Wal-Mart Stores Inc., rose the most in more than a year in Hong Kong trading after first-half profit beat all analysts’ estimates.

Li & Fung, which was upgraded at Citigroup Inc. and CLSA Asia Pacific Markets, gained 7 percent, the most since July 2010, to HK$12.84 at 4 p.m. close in Hong Kong. The stock was the biggest gainer on the benchmark Hang Seng Index.

Net income declined 15 percent to $236 million and core operating profit, excluding items such as interest income, taxes and acquisition-related costs, fell 16 percent to $282 million, the supplier to Toys “R” Us Inc. and Inditex SA’s Zara said in a statement yesterday. Net income beat the $206 million average of seven analysts’ estimates compiled by Bloomberg.

“This is better than expected as we were looking for a 21 percent decline” in operating profit, said Aaron Fischer, CLSA’s Hong Kong-based chief consumer analyst. “We believe earnings will rebound,” said CLSA analysts Fischer and Mariana Kou, who upgraded the stock to “buy” from “outperform.”

Li & Fung has declined 43 percent this year, compared with a 15 percent drop for the benchmark index.

Consumer Sentiment

Costs as a percentage of sales have started to decline in the second half, Chief Executive Officer Bruce Rockowitz said at a briefing in Hong Kong yesterday. Expenses increased after acquisitions last year that included Integrated Distribution Services Group Ltd., Li & Fung’s biggest purchase in at least the past decade, doubled the size of its workforce.

Sales derived from the U.S. were 58 percent of the total $8.8 billion, the lowest percentage since at least 2007, according to data compiled by Bloomberg. Asia sales were boosted by the purchase of Integrated Distribution Services, which operates in the region.

Consumer sentiment has been worsening in the U.S., where Li & Fung, which sells to Limited Brands Inc. and Kohl’s Corp., made 65 percent of last year’s revenue.

“Sentiment obviously is not great, but most of our customers are in good shape, financially,” Rockowitz said in an interview late yesterday. “In a bad market, it’s not terrible for us” said Rockowitz, adding that Li & Fung gained market share during the financial meltdown in 2008 and the year after.

‘Margins Recovery’

“What’s terrible was 2008 and 2009, when people went bankrupt,” he said. “This market is different.”

More private-label goods are being supplied by Li & Fung to clients as they seek to bolster margins amid concerns over faltering economic growth. “People are looking for value, they’re looking for higher margins, and private label is the way to get that,” Rockowitz said.

Li & Fung may make 20 percent of its sales in Asia by the end of its three-year plan in 2013, Rockowitz said. The Hong Kong-based company’s stated goal is to boost annual core operating profit to $1.5 billion.

“Management is confident of margins recovery in the second half with stronger profits from distribution and logistics and rationalization of its operating costs” Eddie Lau, Hong Kong-based analyst for Citigroup, wrote in a note to clients. He upgraded the stock to “buy” from “hold.”

Adding Jobs

The first-half profit margin of 2.68 percent is the lowest since the second half of 2008, according to data compiled by Bloomberg. Five analysts surveyed by Bloomberg News had a median forecast of 2.76 percent.

Costs will be reduced as the company moves workers from the U.S. and Europe closer to production sites such as China, India and Bangladesh, Deputy Chairman William Fung said yesterday.

The company will add about 2,000 jobs, mostly in “lower-cost countries,” as it restructures, Rockowitz said in a Bloomberg TV interview.

“We expect the uncertain environment of the U.S. and European markets will continue for the better part of the three-year plan,” Rockowitz said.

The division supplying Wal-Mart, the world’s biggest listed company, will continue to grow, and will probably hit its target of $2 billion sales this year, Rockowitz said, declining to provide a forecast for 2012.

‘Enough Acquisitions’

Revenue expansion of 33 percent was the fastest six-month growth since the second half of 2007. Annual sales for Li & Fung, whose clients include Esprit Holdings Inc., L’Oreal SA and Coty Inc., grew in all but one of the last 19 years.

Li & Fung yesterday said it bought children’s clothing company Fishman & Tobin and fashion jewelry and accessories maker Crimzon Rose this month. It earlier announced acquiring clothing supplier Loyaltex Apparel and TVMania, a European supplier of branded products whose character licenses include Hello Kitty and Mickey Mouse.

The four companies had total annual sales of about $900 million, Rockowitz said. Li & Fung acquired 10 other companies this year with combined annual revenue of about $300 million, he said.

“This business has enough acquisitions to drive significant revenue growth for the remainder of this three-year plan,” Vineet Sharma and Phoebe Tse, Hong Kong-based analysts at Barclays Capital, wrote in a report . They kept their “overweight” rating on the stock.

Keep Looking

Li & Fung sourced 30 percent more goods from China, where it made 53 percent of its products, in the first half, Rockowitz said. That compared with growth of 52 percent in Bangladesh and 20 percent in Indonesia, the second- and third-largest production bases for Li & Fung, according to the CLSA analysts.

While Li & Fung will keep looking for acquisition targets, “we’re now focused on costs and integration,” the CEO said. “We now really have scale and a lot of opportunity for organic growth.”

The company has about $500 million left in its acquisition fund, from about $1 billion earlier this year, he said. Cash and bank balances amounted to $575 million as of June 30, compared with $969 million at the end of December.

Li & Fung has used acquisitions to boost growth, spending more than $3 billion on deals from 2006 to 2010, doubling both sales and profit in the five-year period, according to data compiled by Bloomberg.

The company will continue to make acquisitions next year, focusing on China and Asia, Rockowitz said. “We are far from slowing down.”

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