The big supplier has reduced its reliance on U.S. clients

Li & Fung, the world’s biggest supplier of goods to retailers including Wal-Mart (WMT), Toys “R” Us, and Kohl’s (KSS), had an upbeat story to tell when it announced results for the first half of the year on Aug. 11. Profit had dropped only 15 percent, the company said, beating the expectations of analysts.

That was the good news.

The bad news is that the Hong Kong company’s stock price has plummeted 42 percent this year through Aug. 24, erasing almost $10 billion in market value. It’s the second-biggest percentage loss this year on the 46-member Hang Seng Index.

That’s pretty much the way things have been going for Li & Fung since the beginning of the global recession in 2007. The company, which supplies its clients from a network of 12,000 factories and has 240 offices in 40 countries, “stands out as a barometer of global consumer sentiment,” says Kenny Tang, Hong Kong-based general manager of AMTD Financial Planning. With unemployment hovering above 9 percent in the U.S., Li & Fung’s biggest market, and household spending rising at a 0.1 percent pace in the second quarter, those barometric readings aren’t looking so great.

That’s led Bruce Rockowitz, formerly the president of the company who recently was promoted to chief executive officer, to shift strategy. While Executive Deputy Chairman William Fung in May said the company would focus on “organic growth,” Rockowitz has embarked on an acquisition spree, acquiring 14 companies in 2011. Among them are Fishman & Tobin, a supplier of children’s clothing to Sears (SHLD) and Macy’s (M), and fashion jewelry and accessories maker Crimzon Rose, whose clients include Target (TGT) and J. C. Penney (JCP). Li & Fung also bought Aéropostale (ARO) supplier Loyaltex Apparel and TVMania, a European supplier of branded products whose character licenses include Hello Kitty and Mickey Mouse. The four companies have combined annual revenue of about $900 million, says Rockowitz. Though he says he would like to focus on integrating the new members of the Li & Fung family, he says he’ll stay open if other acquisitions present themselves.

So far it looks like Rockowitz’s strategy is beginning to pay off. Sales for the first half of the year increased 33 percent, to $8.8 billion, the fastest six-month growth for the company since 2007, according to data compiled by Bloomberg. The acquisitions also have reduced the company’s reliance on the U.S., where its other clients include Abercrombie & Fitch (ANF) and Coty. The percentage of Li & Fung’s sales from the U.S. dropped to 58 percent in the first half of the year from 67 percent in the same period last year. That was largely because of last year’s purchase of Hong Kong-based Integrated Distribution Services, which sells in Asia.

“Our ambition is to both source globally and sell globally,” says Deputy Chairman William Fung, whose grandfather co-founded parent Li & Fung Group in 1906. “You can’t sell globally unless you are selling to China.” Sales in China grew to $526 million, or 6 percent of Li & Fung revenue, in the first half of the year from less than 1 percent the year before. Li & Fung has traditionally sold goods made in China to clients in the U.S. and Europe. While it has increased buying in countries such as Bangladesh and Vietnam, more than half the products it sells are made in China.

The company has a three-year plan that projects it will more than double its core operating profit, to $1.5 billion, by 2013. Fung and Rockowitz say they are confident they’ll meet that goal. “Sentiment obviously is not great, but most of our customers are in good shape financially,” Rockowitz says. “What’s terrible was 2008 and 2009, when people went bankrupt. This market is different.” He says retailers’ reliance on so-called private label products, which provide retailers with better margins than name brands, is good for the company. Wal-Mart and Home Depot (HD) on Aug. 16 raised their full-year forecasts after second-quarter net income, boosted by consumers shopping for discount items, beat analysts’ estimates.

Gabriel Chan, a Hong Kong-based analyst at Credit Suisse (CS), thinks relying on sales growth may not be enough. “They need to drive growth further by having more acquisitions,” he says. “If we assume no further acquisitions, then I think it will be very tough to meet its three-year target.”