Li & Fung Net Tops Estimates; Brands Listing Is Sought

Li & Fung Ltd. jumped the most in more than five years in Hong Kong trading after saying it will spin off a branded business whose products include Coach Inc. shoes and posting profit that beat analyst estimates.

The world’s biggest supplier of clothes and toys to retailers such as Wal-Mart Stores Inc. climbed 17 percent to HK$12.04 at midday break, headed for the largest advance since Oct. 30, 2008. The benchmark Hang Seng Index rose 0.2 percent. At least two brokerages, CLSA Ltd. and Nomura Holdings Inc., raised their rating on the stock to buy.

The spinoff of what billionaire Chairman William Fung described as a “cash generator” would allow the company to focus on its core and more stable trading business. The Hong Kong-based company yesterday reported net income rose 17 percent to $725 million in 2013 as profitability improved across divisions, surpassing the $594.2 million average of 14 analyst estimates compiled by Bloomberg.

The move “gives investors the option of keeping or disposing of what is seen as a riskier business,” Vineet Sharma, a Hong Kong-based analyst at Barclays Capital Inc., wrote in a note today. “We are positive on the development,”

Li & Fung proposed to list the brands and licensing business called Global Brands Group, which wholesales more than 300 licensed brands to retailers. The portfolio includes belts from Michael Kors Holdings Ltd. and some Juicy Couture clothing.

Planned Listing

Li & Fung’s core business is sourcing and managing the supply chain for retailers, “which is very different from nurturing the brands,” Chairman Fung said in an interview with Bloomberg Television. “It requires a different management expertise, that’s why we decided it should be a separate business.”

If regulators approve the listing, planned for this year, Chief Executive Officer Bruce Rockowitz will become CEO of Global Brands, while his current role will be assumed by Spencer Fung, the group’s chief operating officer and nephew of the chairman.

William Fung, who will become a non-executive chairman of Global Brands after the unit’s listing, said Spencer Fung is “ready for a challenge.” He said he would “very much like to see” his nephew “firmly ensconced in his new position and the company to move in this new direction before I take a bow.”

The trading unit, which sources toys and clothes for U.S. retailers, accounted for 62 percent of core operating profit in 2013, making it the largest contributor. That’s followed by the distribution business with 34 percent.

Core Earnings

The company, whose customers also include Target Corp. and Kohl’s Corp., posted a 70 percent jump in core operating profit to $871 million, beating the $851 million median estimate of six analysts surveyed by Bloomberg News. Margins improved amid signs of an economic recovery in the U.S. and sales climbed 3 percent to $20.7 billion.

Unemployment claims in the U.S., Li & Fung’s largest market accounting for 62 percent of revenue in 2013, held last week near the lowest number in almost four months. Consumer confidence in the period ended March 9 rose to the second-highest level since August.

Li & Fung reported a profit decline in 2012, its first full-year drop since the global financial crisis in 2008. The company last year completed a restructuring of LF USA, which licenses and supplies brands to retailers, after booking $39 million operating loss at the unit for the previous 12 months.

LF USA, whose sales make up more than half the distribution unit’s total, is on course to recover from restructuring and the discontinuation of some brands, the company said.

‘Robust Mode’

“There isn’t great increase in overall consumption” in the U.S., Chairman Fung said. Still, he projected that the U.S. will be back “in robust mode” in three years, while China will provide the fastest growth as it poised to become an important consumption economy.

Li & Fung, which has relied on acquisitions to increase sales, said yesterday it will accelerate organic growth across businesses in the three years through 2016. The goals are to double core operating profit at the logistics division and more than double it at Global Brands. The company also aims to improve the returns on invested capital across the group.

Li & Fung has made two acquisitions this year, including the purchase of China Container Line, a sea freight forwarder in China, to expand its logistics business.

The company plans to buy brands that are “capable of being globalized” during the three-year period, Rockowitz said at a briefing in Hong Kong yesterday. He didn’t elaborate.

Li & Fung traces its beginnings to 1906 as a porcelain and silk trader in China and now supplies U.S., European and Asian retailers with clothes, toys and furniture.

(Updates with chairman’s comment in sixth paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE