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Li & Fung Profit Misses Estimates on Weaker U.S. Demand

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Li & Fung Profit Misses Estimates on Weaker U.S. Retail Demand
Li & Fung, whose customers include U.S. retailers Wal-Mart Stores Inc., Target Corp., and Kohl’s Corp., reported a drop in net income last year, the first decline in four years as an increase in payroll taxes, higher fuel costs and federal spending cuts hurt Americans’ consumer confidence. Photographer: Emile Wamsteker/Bloomberg

Aug. 14 (Bloomberg) -- Li & Fung Ltd., the world’s largest supplier of clothes and toys to retailers, reported first-half profit that missed analyst estimates amid sluggish demand from U.S. retail customers.

Net income fell 16 percent to $96 million for the six months ended June from a year earlier, excluding a writeback in the year-earlier period, the Hong Kong-based company said in a statement yesterday. That missed an average estimate of $106.3 million from three analysts compiled by Bloomberg.

Li & Fung, whose customers include Wal-Mart Stores Inc., and Target Corp., has been pushing to revive its U.S. business after reporting a net income decline last year. Operating earnings are set to pick up in the second half of this year due to back-to-school and holiday season demand, the outsourcer said.

“While the US retail environment is tracking with the slow pace of economic recovery, it has remained challenging,” it said in yesterday’s statement.

Li & Fung gets more than 60 percent of its revenue from the U.S. and earnings declined last year as an increase in payroll taxes, higher fuel costs and federal spending cuts hurt consumer confidence in the world’s largest economy. Retail customers have all adopted a “more cautious view toward their winter sales this year,” it said yesterday.

U.S. Unit

To revive its U.S. unit, the company has changed management and discontinued some brands. That restructuring is on track to be completed by the end of 2013, it said.

LF USA is hitting bottom, said Anne Ling, an analyst at Deutsche Bank AG and who expects a strong recovery in 2014 for the group because of an improving U.S. economy. She upgraded the stock to ‘buy’ from ‘hold.’

Core operating profit rose 1 percent to $223 million. Second-half core operating profit will be 3 to 4 times that of the first half and orders for the second half are “solid,” Chief Executive Officer Bruce Rockowitz said at a press conference.

“The worst is behind us and we are on track to recovery in 2013,” the company said in its statement. Li & Fung’s order book is 80-85 percent filled, the same as in previous years, said Eddie Lau, a Citigroup analyst who expects strong cash flow in the second half of the year as the group’s earnings are skewing more to that period. He reiterated his ‘buy’ rating.

Acquisitions

Li & Fung, which in March abandoned its three-year profit target, has relied on acquisitions to boost growth, spending about $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.

The company made five acquisitions in the first half. Earnings in the same period last year were boosted by a writeback of $198 million on estimated payouts for prior acquisitions.

The company, which traces its beginnings to 1906 when parent Li & Fung Group was founded, supplies U.S., European and Asian retailers with clothes, toys and furniture.

China will remain the company’s top sourcing destination even as apparel sourcing from Bangladesh rose ‘significantly,’’ Rockowitz said. The company has no plans to raise funds this year, he said.

Li & Fung shares rose 1.4 percent to close at HK$10.54 in Hong Kong yesterday. The benchmark Hang Seng Index advanced 1.2 percent.

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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