March 20, 2014 1:19 pm

Li & Fung: split personality

World’s largest supplier of consumer brands has a new strategy

The first step in a turnround is to stop disappointing investors. The second is to come up with a credible new direction. Li & Fung managed the first last summer. Full-year earnings on Thursday reinforced the point. It also has a new strategy.

The company’s problems are emblematic of those facing all Asian middlemen. Its core business of sourcing Asian goods for western customers, from Marks and Spencer to Walmart, has come under pressure as the two sides try dealing direct. Li & Fung also works to its own set pattern of three-year plans. Two sets of deal-driven strategies have now missed targets. The shares are half their level of two years ago, and have dropped from trading on 26 times forecast profits to 16. Li & Fung’s string of smallish deals have long frustrated outsiders’ efforts to assess organic growth. The boost from writing back $513m in unearned deal-related payouts in 2012 and 2013 – equivalent to a third of operating profits – is no comfort, since it reflects poor performance. Ventures into brand ownership and licensing complicated matters too.

Li & Fung’s new plan splits it into a sourcing and logistics company and a global brands group. The all-stock spin-off should happen this year. Investors will then have a choice between an established, lower-margin sourcing business and a big brand portfolio with volatility but growth potential. The two require different enough skills to make a split sensible. Knowing where to source material for the latest hot T-shirt trend is very different to marketing it. The thing to watch is whether either side can hold off on dealmaking. The company thinks it can, but habits like that are hard to break. A sea freight forwarder was added to the logistics unit just on Thursday. Li & Fung’s shares have languished near lows for a year now. Investors can wait for proof it has changed before backing it further.

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