Apparel Sourcing Intelligence - Worldwide

Li & Fung “worst performing shares” after Walmart email leak

Li & Fung (L&F) shares lost half their value between March 2012 and February 2013, making the company the worst performer on the Hang Seng Index after a collapse in shareholder confidence following a profit warning, poor sales at major client Walmart and the loss of some Walmart, Carters and Fifth & Pacific business.
After hitting just over $HK 20 per share n spring 2012, the company’s stock hit $HK 10 during February 18, after a leaked Walmart email added to worries L&F had caused the market over the previous few months.

“In case you haven’t seen a sales report these days, February MTD sales are a total disaster,” Jerry Murray, Walmart’s vice president of finance and logistics, said in a February 12 e-mail to colleagues, referring to month-to-date sales, which was leaked to the market on February 18 “The worst start to a month I have seen in my about 7 years with the company.” Though details were unavailable, fear of falling purchases at L&F’s biggest client badly damaged attitudes already strained by a string of bad news from L&F.

On February 8, Fifth and Pacific announced through a US regulatory filing the end of its US warehousing and distribution agreement with L&F. Though L&F later clarified that its contract to source for the retailer was unaffected, the market appears to have misunderstood. In early January, L&F issued a profits warning for the year ending December 31, mostly based “on the preliminary review of the ongoing restructuring of LF USA’s business, including the reduction in the number of brands distributed in the USA which negatively impacted the Company’s margin”. Though the warning related to distribution within North America, it forecast that “core operating profit is expected to be lower by approximately 40% (compared to the corresponding period in 2011).” The market took it as a sign its core business was being hit.

This followed announcements in September that Walmart would not exercise its option to buy a Walmart/L&F joint venture, and earlier that Gymboree and Carter’s would move back into partial direct sourcing.

Market reactions to all this varied widely, with analysts giving massively different explanations for L&F’s problems. Some believed the trend L&F had touted of outsourcing sourcing was about to go into reverse, with buyers bringing the function back in house. Others saw L&F’s problems mostly in its US business, which restructuring would eliminate eventually, while others blamed the whole L&F business for lacking transparency.

L&F are due to present their 2012 results on March 22