Li & Fung Drops on Operating Profit Decline

Li & Fung Ltd., the world’s largest supplier of clothes and toys to retailers, fell the most in five months in Hong Kong trading as operating income slumped 40 percent last year because of weaker orders at its U.S. business.

The stock dropped 15 percent to close at HK$11.74, the biggest decline since Aug. 10. About 255.3 million shares changed hands, more than 10 times the three-month average.

A slower-than-expected recovery at the U.S. unit contributed to the profit decline, Li & Fung said in a preliminary earnings statement on Jan. 11. The Hong Kong-based supplier to Wal-Mart Stores Inc. said in August that sales growth in the U.S. trailed its expectations because of weaker consumer spending.

“Li & Fung is still a quality company, but I think it will take two to three years for them to turn around the U.S. business,” said Tanuj Shori, a Hong Kong-based analyst at Nomura Holdings Inc., who cut his rating on the stock to reduce from neutral after the profit warning.

Li & Fung supplies global retailers with Asia-made clothes, toys and furniture. It posted core operating profit of $882 million in 2011.

U.S. Troubles

U.S. retailers have relied on discounts to boost sales with unemployment close to 8 percent. In December, 4.8 million Americans were out of work for six months or more, according to the Labor Department.

“Several brands in this business, it seems, have run into trouble and appear to be chronically under-performing,” Barclays Plc analyst Vineet Sharma said in a Jan. 14 research note to clients, referring to company’s U.S. unit.

Li & Fung got about 60 percent of its revenue from the U.S. in 2011, data compiled by Bloomberg show. Analysts on average forecast 2012 operating profit of $885 million for the company, according to 16 estimates compiled by Bloomberg before the company issued the statement.

Net income in 2012 is “unlikely to exceed” the previous year, Li & Fung said, citing a preliminary review. It reported earnings of $681 million in 2011. This would be the first time since 2008 that Li & Fung’s annual profit hasn’t risen, according to data compiled by Bloomberg.

Dow Famulak replaced Richard Darling as president of the LF USA business effective Dec. 19, the supplier said. Famulak was president of the company’s DSG unit, a dedicated sourcing group servicing Wal-Mart globally, according to Li & Fung’s 2011 annual report.

Li & Fung, whose customers include U.S. retailer Kohl’s Corp., in March raised HK$3.9 billion ($503 million) in its biggest share sale since listing in 1992.