Li & Fung Ltd. had its credit rating lowered one level by Standard & Poor’s because growth at the world’s largest supplier of clothes and toys to retailers may be slower than needed to meet earnings targets.
The rating on Li & Fung’s outstanding senior unsecured notes was cut to BBB+, the third-lowest investment grade rating, from A-, S&P said in a statement.
Li & Fung has declined 26 percent this year, the biggest percentage decline on the Hang Seng Index in Hong Kong. Growth at the trading and logistics businesses of the Wal-Mart Stores Inc. and Target Corp. supplier is “likely to be weaker” than needed to meet its three-year earnings targets, the ratings company said.
“We do not expect the company’s financial strength to be restored to a level that supports an ’A-’ rating,” Bei Fu, a credit analyst at S&P, said in the statement. “Li & Fung faced greater challenges while executing its expansion strategy than it had expected, especially amid a weak global economy in the past two years.”
S&P also cited the $39 million operating loss last year for the distribution unit, which licenses and supplies branded goods to retailers.
The Hong Kong-based outsourcer’s Chief Executive Officer Bruce Rockowitz last month said the company will miss its 2013 profit target after net income dropped for the first time in four years as a sluggish U.S. economy damped demand. He had in 2010 set a goal of $1.5 billion operating profit for 2013.
Shares of Li & Fung rose 1.1 percent to HK$10.06 in Hong Kong. The benchmark Hang Seng Index advanced 1 percent.
Fu, who had placed the Hong Kong-based company on credit watch negative on Jan. 14, said Li & Fung is expected to adopt a more conservative acquisition strategy in 2013, and will make fewer purchases versus the last two years.
S&P first initiated its A- rating of Li & Fung in 2004, according to data compiled by Bloomberg.