The force is weak in them. Even the combined powers of Yoda's light-sabre lip balm, Bob the Builder t-shirts and Jennifer Lopez bras haven't been enough to lift Li & Fung's sagging earnings.
The world's biggest supplier of toys and apparel to companies such as Wal-Mart Stores and Kohl's warned investors two years ago that the age of cheap manufacturing in China was over. Li & Fung set a target of US$1.5 billion in operating profit by this year, with almost half coming from acquiring, licensing and distributing branded goods.
The strategy's not working.
Li & Fung is likely to fall short by almost US$600 million, according to the average estimate of 15 analysts in a survey. Operating earnings plunged about 40 per cent last year after weaker consumer sentiment and margins hurt a US unit that sold brands under licence, the company said last month. The shares slumped 15 per cent the next trading day, and hit a 3-1/2-year low on Friday.
"Li & Fung is trying to reposition itself, shifting its focus to more brand-management businesses, rather than just being a middleman," said Gabriel Chan, a Hong Kong-based analyst at Credit Suisse Group.
"The company is in the middle of a reform and it's facing challenges from all fronts."
In the US, where Li & Fung gets about 60 per cent of its US$20 billion in annual revenue supplying toys and clothes to retail chains, unemployment has hovered near 8 per cent as the economy struggles to escape the 2008-2009 recession. Gross domestic product contracted 0.1 per cent in the fourth quarter. Revenue from Europe has wilted amid the region's debt crisis, falling to 18 per cent of the total from 29 per cent in 2008.
At the same time, manufacturing costs are climbing in China, Li & Fung's biggest sourcing location. Minimum wages rose an average 20 per cent in 25 provinces last year, the country's labour ministry said last month.
Li & Fung shares have plunged about 39 per cent over the past year, the worst performer on Hong Kong's 50-strong benchmark Hang Seng Index.
Twelve of 23 analysts who cover the company recommend investors sell the stock: the most pessimistic view on its prospects since May 2009. Six rate the shares "hold", with five "buys".
The company traces its roots to 1906, when parent Li & Fung Group was founded. In recent years, it has acquired rivals and entered into supply agreements to sell American and European retailers consumer goods that are mostly made in Asian countries.
Now, some retailers are sourcing directly from suppliers in markets such as Bangladesh, Vietnam or Indonesia that are cheaper than China, according to Chan.
"I would say 2010 was the year that the deflationary trend for goods ended," Li & Fung president Bruce Rockowitz said on an earnings call in 2011. "We're into a new era of higher prices of sourcing," he said, laying out the company's three-year plans to seek higher growth businesses.
Gross margins for the distribution unit could go as high as 25 per cent this year, compared with about 8 per cent for sourcing, said Charles Yan, a Hong Kong-based analyst at Standard Chartered, who recommends investors buy the stock. "The company is still a solid business and it has no real competitor globally," he said.
To bolster distribution, Li & Fung bought companies including TVMania, a supplier of Hello Kitty and Bob the Builder t-shirts, and jewellery and accessories maker Crimzon Rose.
Other purchases include youth cosmetics company Added Extras, which sells the Star Wars-branded lip balm. In the US, the company distributes brands in part through its Mesh venture with New York-based Star Branding, whose partners include Andy and Tommy Hilfiger. Li & Fung's US business separately signed licensing agreements to sell Marilyn Monroe apparel at Macy's and Lulu Guinness accessories in the first half of last year.
Earnings may become more unpredictable as the pace of growth in existing operations slows and the company tries to integrate its acquisitions, according to Bank of America Merrill Lynch analysts. Li & Fung announced 15 takeovers worth US$1.6 billion in the past three years, data shows.
Unlike sourcing, where Li & Fung depends on its ability to locate low-cost manufacturers that can meet its clients quality and volume demands, distribution hinges on securing the right brands. Managers also need the skills to manage more of the supply chain, including design and selling to outlets.
Some of the brands Li & Fung had "are little known", Chan said. "L&F needs to acquire bigger and more significant brands, but they don't come cheap."