One of the world's largest supply-chain middlemen, Li & Fung Ltd. is set to offer clues about the U.S. retail sector's health when the supplier to chains, such as Target Corp.  and Wal-Mart Stores Inc., reports first-half earnings on Thursday.
Li & Fung, which is based in Hong Kong, contracts with about 15,000 factories world-wide to produce clothes, toys and other products for some of the largest U.S. retailers. Analysts cite a loose correlation between Li & Fung's sales and U.S. retail sales: When the retailers perform well, they tend to order more products from sourcing agents such as Li & Fung.
Anastasia Vasilakis
"Li & Fung does whatever U.S. retail sales do and a little better," said Nicholas Studholme-Wilson, an analyst at Sun Hung Kai Financial,which rates Li & Fung a "buy." The firm expects Li & Fung's revenue to increase 6% this year, compared with U.S. retail-sales growth of 3% to 4%. "They are consistently taking market share," he said.
The National Retail Federation estimates that U.S. retail sales rose 2.9% in the first half.
U.S. retailers have yet to see a strong pickup in sales, despite a recovering domestic economy, and are gearing up for challenging back-to-school and holiday shopping seasons. Some of that weakness may be apparent in Li & Fung's first-half results, although, as with the U.S. retail industry, most of Li & Fung's sales come in the second half.
Li & Fung's results this year also could be hampered by an increase in operating expenses, analysts say. It is adding employees after spinning off its brand-licensing business and starting up a safety-and-operations consulting unit.
Investors will watch for whether more Western retailers are starting to cut out middlemen, such as Li & Fung, and obtain products directly from factories to reduce costs and gain control over supply chains. Wal-Mart in 2012 canceled much of a deal in which Li & Fung supplied goods for the U.S.-based retailer's overseas stores. Children's apparel company Carter's Inc. has said it also plans to obtain more of its products directly.
But other companies that had moved to obtain more products directly from factories are taking another look at their strategies. Gymboree Corp. recently decided to consolidate and transfer sourcing from its buying offices to Li & Fung, the Hong Kong company said. Gymboree declined to comment.
A deadly factory fire in Bangladesh and similar incidents in other emerging markets are leading some retailers to scrutinize their suppliers more carefully and could lead to more business for Li & Fung's new factory-consulting arm, analysts say.
"As some retailers become concerned about the [factory] working environments, they will feel more comfortable about using a sourcing agent that makes guarantees and performs checks," said Aaron Fischer, an analyst at CLSA Asia-Pacific Markets.