Li & Fung Ltd. grew to be a powerhouse by squeezing cost out of the supply chain — and although analysts fear the company is now feeling the squeeze itself, Bruce Rockowitz begs to differ.Rockowitz, who is president and chief executive officer of Li & Fung, brushed aside outside concerns that the company’s role as a “middleman” is not sustainable, that it’s too reliant on momentum-losing private label brands and that it is facing rising labor costs, particularly in China.Instead, the ceo was optimistic about the future, noting that the troubled LF USA unit swung back to profitability in fiscal 2013 and that sales in the U.S. are picking up.“Things have been written about private brands diminishing,” Rockowitz told WWD in an interview earlier this year before the company entered a blackout period ahead of releasing its full-year 2013 numbers on Thursday. “We don’t see that trend. We don’t see what people are actually talking about.”The ceo said some market observers have taken a few isolated examples of department stores scaling back their private label business and made sweeping generalizations.“Our percentage of private brands to the department store level is only a small part of our business and we don’t see that trend anyway,” he said.As the firm prepares to present its new three-year plan this month, analysts are looking for scaled-down expectations, fewer acquisitions and a stronger focus on organic growth. That reticence stems not only from Li & Fung’s recent track record, but also stiff headwinds from a changing industry. In August, the company reported profits in the first half of the year dropped 69 percent to $96 million, while sales came in flat at $9.13 billion amid a “challenging” retail environment in the U.S. The firm counts Kohl’s Corp. and Wal-Mart Stores Inc. as its two biggest clients, but also works with American Eagle Outfitters Inc., Aéropostale Inc., PVH’s Corp.’s Tommy Hilfiger and Kate Spade.“They’ve been more cautious in the last six months on guidance,” said Mariana Kou, analyst at CLSA in Hong Kong, of Li & Fung. “They have a bad track record in missing a couple of [previous targets] already.”Rockowitz did not disclose any financial forecasts but he did allow that the company’s turnaround of its U.S. unit is “totally on track” and the division will swing from a loss in fiscal 2012 to a profit in fiscal 2013. “We’re now past the difficult part,” Rockowitz said.Speaking more broadly, he characterized 2013 as a “very volatile year” for the U.S. and noted sales there turned out “pretty well” over the final five or six weeks of last year, although there was a lot of discounting. Elsewhere, Europe “looks better than the numbers,” with the U.K. doing better than expected, he said.“[In] 2008 the world fell apart, it really takes six to seven years to recover [from] that size of calamity and we’re coming out of it now,” he said. “I’m looking forward to the next three years.”Li & Fung shares rose 0.8 percent Tuesday to 10.14 Hong Kong dollars, or $1.31, but the stock dropped 25 percent last year, reflecting the company’s challenging outlook. In December, Moody’s downgraded the company’s credit rating to “Baa1” from “A3,” citing risk from its distribution business and uncertainty in the global macroeconomic environment.For years, Li & Fung has built its reputation as a low-cost sourcing specialist. The firm’s trading unit boasts a network of 15,000 suppliers in China, Bangladesh, Cambodia and elsewhere. Analysts contend the difficulty with this model is that costs in China, where the company does much of its sourcing, are rising at a time when the U.S. economy and U.S. consumer spending remain sluggish. Wages are also rising in Cambodia, where labor protests have turned deadly. And the apparel industry in Bangladesh is still dealing with the aftermath of the tragedies at Rana Plaza and Tazreen Fashions that killed more than 1,200 people and resulted in the formation of two international groups of retailers and brands aimed at toughening safety standards in factories there and improving working conditions.“We suggest investors focus on the sustainability of Li & Fung’s ‘middleman’ model in an increasingly transparent and connected world,” said Spencer Leung, analyst at UBS. Leung has a “sell’ rating on the company’s shares and noted some retailers, buyers and suppliers feel Li & Fung’s biggest competitive advantage in the past — its flexible network of factories — has turned into its biggest weakness.Factories generally make about 1 to 3 percent net margin while wages in China are rising at about 10 percent a year and labor usually makes up 20 percent of the cost of goods. For the past two decades, middlemen such as Li & Fung have been squeezing suppliers, which make close to no profit. But as margins shrink to nothing, suppliers are increasingly walking away. Fast-fashion retailers such as Zara, H&M and Uniqlo are also emphasizing speed over margins and dealing directly with factories.Rockowitz was quick to debunk the theory that Li & Fung’s business model has come under strain.While the executive acknowledged that costs are rising in China, he said it’s also important to note that Chinese factories’ expertise and efficiency outpace that of other countries, particularly in areas such as leather goods, shoes and toys. Currently Li & Fung does about half of its overall manufacturing in China and half in other countries like Bangladesh and Cambodia, Rockowitz said. But he specified that it’s a different story for apparel, where Li & Fung does only 25 percent of its sourcing in China. “[The Chinese are] more efficient than all the other countries and so the cost of labor is higher but they need fewer people and the accuracy is higher, the quality is better, the compliance is better,” he said. Rockowitz similarly dismissed the suggestion that the “middleman” model is not sustainable.“Honestly that story comes out every five years or so…what happens is one or two people open their own [sourcing] office and it creates a trend in people’s minds,” he said. “There’s no overall trend in the market per se. We have not lost any customers…any large customers, any sizable customers to that trend in the last few years.”If anything, Rockowitz argued, the market is moving in the other direction with retailers and brands realizing the importance of having a partner when it comes to manufacturing in volatile developing countries. Worker safety issues have taken center stage in the fashion industry since the Rana Plaza disaster last April.“I think the [Bangladesh] tragedy really showed a lot of brands and retailers that they do need a partner like Li & Fung to oversee not just the quality of production and not just the pricing, but also to oversee the integrity of the factories and that the treatment of workers is in line with what it should be,” he said.In January Li & Fung said it created a new business unit to zero in on factory and worker safety. Dubbed Vendor Support Services, the unit will be led by group chairman Dr. William K. Fung.“As the leading sourcing company in the world, we feel our responsibility is to play an even bigger role in bringing about and speeding up systematic positive change in the industry,” Fung said.Li & Fung’s outlook has also been impacted by its relationship with Wal-Mart, the world’s largest retailer. In a move that some saw as highlighting the challenges in Li & Fung’s trading business, the company revised its deal with Wal-Mart in 2012 and signed a new five-year agreement with the retailer.“It’s well known that the Wal-Mart deal hasn’t performed as well as originally expected,” said CLSA’s Kou, noting that Li & Fung is now mostly dealing with Sam’s Club, rather than all of Wal-Mart. The partnership seems to be fairly steady but with “not as much growth as before,” she said. CLSA estimates Li & Fung’s revenue will grow 9 percent in 2014.Rockowitz downplayed the significance of the altered agreement with Wal-Mart, characterizing the changes as “minor.” Under the previous deal, Li & Fung channeled its Wal-Mart sourcing exclusively through one of its subsidiaries, Direct Sourcing Group, but now it can leverage other parts of its business to serve Wal-Mart, the ceo said.The market is also eyeing Li & Fung’s acquisition strategy going forward. The company has snapped up a number of assets over the past several years, including New York-based handbag importer Van Zeeland Inc. and Beyoncé and Tina Knowles’ fashion business Beyond Productions. Rockowitz said Li & Fung will still make acquisitions as opportunities present themselves but that the firm is emphasizing organic growth over the next few years.“The focus will be to utilize what we have, grow what we have, do more with existing customers and do a better job with existing customers and, of course, get new customers,” he said.Nicholas Studholm-Wilson, an analyst at Sun Hung Kai Financial, has a slightly more optimistic take on the company than some of his peers. Though he acknowledged that the sluggish consumer outlook in the U.S. is difficult, he said Li & Fung could improve its growth profile by targeting emerging markets as a distributor of brands. Li & Fung is also diversifying, the analyst said, and now has about 35 percent of its business in non-apparel hard goods.The company is likely to focus on strengthening its distribution and trading businesses, said Studholm-Wilson, who has a “buy” rating on Li & Fung. “The problem is if consumption doesn’t get better, then they have to rethink their strategy,” he said.
A first look at @virgilabloh’s sneakers for @louisvuitton. Abloh spoke to WWD about his debut collection for Louis Vuitton, creating @kendalljenner’s #metgala outfit and redefining the heritage brand. Read the full story on WWD.com. #wwdfashion 📷: @alfredo_piola)
The world’s largest producer of denim @iskodenim is sharing the strategy behind its product development process. Read our full interview with ISKO’s product development manager Baris Ozden on the company’s extensive research practices, upcoming denim trends and the latest material innovations on WWD.com. #iskodenim
“I genuinely fell in love with water, I fell in love with Fiji, I fell in love with the whole life that we lived for those few months,” says @mrsamclaflin of filming for his new movie “Adrift” with @shailenewoodley. The 31-year-old actor spoke with WWD about his upcoming projects, meeting Jamie Dornan and working with co-star Woodley. #wwdeye (📷: @jamstoker)
3 years ago, fans of the late singer Aaliyah started calling for a collaboration with @maccosmetics. With the strength of social media — including mock ups of products — 25,000 people signed a Change.org petition for a limited-edition collection, and MAC couldn’t ignore the buzz. Tomorrow, MAC will unveil MAC x Aaliyah, a tribute to the singer who passed away nearly 17 years ago. Head to our stories to preview the new collection, which was worked on by Aaliyah’s family and inspired directly by her makeup bag. #wwdbeauty
Artistic director @clarewaightkeller will be dedicating @givenchyofficial’s fall 2018 couture show in Paris on July 1 to house founder Hubert de Givenchy, who passed away in March at age 91. Givenchy said the collection would be “an homage to his iconic creations, technique, and personal lexicon” and a “celebration of his timeless elegance and grace.” Head to WWD.com to read more. #wwdfashion (📷: Delphine Achard)
La Double J made a name for itself with its vintage-inspired prints, but for resort, designer JJ Martin has ventured into new territory: enter rich jewel toned solids and decadent embellishment, in the form of appliqués, crystals and sequins. #wwdfashion #resort19 #ladoublej
This Just In: J. Crew Group has named Johanna Uurasjarvi as its chief design officer.
Uurasjarvi succeeds Somsack Sikhounmuong, who left the company last September. Tap the link in bio for the full report. #wwdnews
“She came into my hotel room and she was like, ‘I have Chanel and Christian Dior.’ She was like, ‘Chanel likes you.’ And I was like, ‘I’m going to start crying,’” breakout star Maddie Hasson tells WWD of her styling sessions Molly Dickson. “I really like classic, elegant things. I love the way Anna Wintour dresses.” Read more about Hasson’s role in @impulseseries on wwd.com. (📸: @jgreenery ) #wwdeye
@virgilabloh revealed he's working with Australian stylist and
Vogue Australia fashion director @christinecentenera for his debut @louisvuitton men's collection, which will be presented in Paris on June 21. Centenera met Abloh while both working with Kanye West, where she consulted on his all his runway collections since his debut spring 2012 women's wear show. Read the full story on WWD.com. #wwdfashion #wwdnews (📷: @asussmanphoto)