Li & Fung Falls on Challenging U.S., Europe Outlook

Li & Fung Ltd., the world’s largest supplier of clothes and toys to retailers, dropped the most in more than eight months after saying conditions will remain challenging in key U.S. and European markets.

The company controlled by William and Victor Fung fell 4.6 percent, the biggest decline since Dec. 12, to HK$10 at the close of Hong Kong trading. It was the second-worst performer today on the benchmark Hang Seng Index, which rose 0.5 percent.

Li & Fung, which has Wal-Mart Stores Inc. and Target Corp. as its two top customers, said yesterday most of its customers are delaying order decisions until they get better indications about consumer confidence in the third quarter. It also reported first-half core operating profit declined 9 percent to $227 million on higher costs.

“Heavy promotional activity is being used to drive traffic in what many expect to be a disappointing shopping season,” Karim Salamatian and Rebecca Kwee, analysts at Credit Suisse Group AG, said in a note to clients. “This will weigh on Li & Fung’s earnings potential.”

The analysts downgraded the company to underperform, or sell, from neutral, or hold, due to the weaker earnings outlook for the second half.

Forecast Cuts

The outlook at Li & Fung, which gets about 60 percent of revenue from the U.S., follows cuts in full-year profit forecasts at Wal-Mart Stores and Target. American consumer confidence unexpectedly fell to a nine-month low in August and households see price gains probably outpacing earnings growth.

Net income rose 16 percent to $111.4 million in the six months ended June, while sales climbed 3 percent to $8.7 billion, the company reported yesterday.

Revenue from the U.S. increased 3.5 percent, “mainly driven by the strong growth in retail sales of key customers in home furniture and kids wear products,” it said.

Recent U.S. figures show greater employment opportunities haven’t translated into the income levels needed to invigorate American consumer spending. A recent Commerce Department report showed retail sales were muted in July, the weakest performance in six months, after a 0.2 percent advance in June.

In Europe, the Russia and Ukraine crisis has reduced foreign travel by Russian nationals, and this is starting to impact the European retail markets favored by Russian tourists, Li & Fung said. Europe accounts for about 18 percent of the company’s revenue.

Brand Management

Li & Fung last month completed a separation of its brand-management and licensing units. The new company Global Brands Group Holding Ltd. began trading July 9 in Hong Kong. The move will allow Li & Fung to focus more on its main businesses of supplying clothes and toys to global retailers, the company said before the listing.

Global Brands, led by former Li & Fung President and CEO Bruce Rockowitz, reported its core operating loss widened to $63 million in the first half, compared with a $25 million loss, as it spent more on new labels, according to a separate statement. It incurred an one-time cost of $31 million related to reorganization and listing. Sales gained 1.4 percent to $1.35 billion.

Shares of Global Brands plunged 8.3 percent to close at HK$1.87 in Hong Kong.