| HONG KONG, March 21
HONG KONG, March 21 Quality, not quantity:
that's the advice investors would like global supply chain
manager Li & Fung Ltd to heed as it snaps up
little-known brands to fuel growth in a business environment
where more retailers source goods on their own.
Caught out by a decline in retail sales in the United States
and Europe, which account for 80 percent of its revenues, Li &
Fung switched its strategy over the past three years to become
less of a middleman and more of a brand-management business.
But many of the brands it has acquired so far have
underwhelmed investors. The company has already warned of a 40
percent slide in 2012 operating profits and shares have fallen
nearly 24 percent so far this year.
"Since its acquisitions have so far failed to impress
investors or create value for shareholders, it will help if the
company slows its pace of M&A and looks to some good quality
ones," said Steve Chow, the retail sector analyst at Hong Kong
brokerage firm Sunwah Kingsway Research.
Li & Fung supplies some of the world's largest retailers
including Kohl's Corp, Wal-Mart Stores Inc and
Target Corp with goods from shoes to cosmetics.
Wal-Mart and Carter's Inc, however, are now sourcing
more goods directly from manufacturers. In response, Li & Fung
cut the number of brands it distributes in the United States.
The company is expected to outline its M&A strategy when it
reports earnings on Thursday. In August, Li & Fung described its
acquisition pipeline as strong and said it expected to strike
more deals in 2013.
"If they focus on buying good brands at good valuations, it
will be an interesting opportunity as Asia and emerging markets
are really hungry for brands," said consumer analyst Nicholas
Studholme-Wilson at Hong Kong brokerage Sun Hung Kai Financial.
Li & Fung was among the best annual performers on the Hong
Kong Stock Exchange between 2007 and 2011. The stock has so far
plunged 61 percent from an all-time high hit in 2011.
BUY BETTER; BUY SLOWER
Some analysts say a three-year target to grow operating
profits to $1.5 billion by 2013 has pressured management to rush
into deals. In January, Credit Suisse said it appeared that some
companies Li & Fung had acquired in the past few years had
failed to meet earnings targets.
Li & Fung signed four acquisitions for its trading network
unit, which represents about 70 percent of the group's turnover,
and six licensing deals in the first half of 2012, building on
19 acquisitions in 2011.
In January, it made its first major acquisition since
raising $1 billion in equity and a perpetual bond last year,
paying $190 million for Lornamead, which owns personal care
brands such as Yardley cosmetics and hair products Finesse and
"Management has got to integrate acquisitions better and it
needs to get more synergy," said Studholme-Wilson. "The company
needs managers who are still hungry to grow the business."
Li & Fung, whose clients also include J C Penney Co Inc
, is expected to post a profit of $629 million for 2012,
according to Thomson Reuters StarMine SmartEstimate.
Profit for the second half is estimated at $317 million.
In August, Li & Fung recorded a 32.5 percent increase in its
January-June profit to $312 million.