Fraying at the seams

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."