Restructuring Costs Weigh on Li & Fung 2012 Profit

Li & FungHong Kong–Li & Fung Ltd has seen its full-year profit slump despite a slight rise in revenue, blaming ongoing restructuring costs and weakness in its distribution business.

The sourcing giant is now also unlikely to meet its target of $1.5 billion in core operating profit by 2013, as envisaged in its current three-year plan.

Li & Fung, which supplies clothing and toys to the world’s largest retailers, including Walmart, Target, Kohl’s and Marks & Spencer, said core operating profit tumbled 42% to $511 million, down from $882 million a year earlier.

It added that the drop was due to costs of restructuring LF USA’s business and a reduction in the number of brands distributed in the United States.

Net profit in the year to Dec. 31 was down by 9.4% to $617 million, from $681 million last time. Revenue edged up just 1% to $20.22 billion from $20.03 billion, which the group said reflects on-going strength in its core trading business.

“We recognized that our biggest management challenge was the restructuring of LF USA, which became more costly than originally envisioned,” Bruce Rockowitz, president/ceo, said Thursday in a statement. “We took swift, decisive action to address the issue and also introduced strict cost control measures across the Group.”

Rockowitz also observed that the global economic environment in 2012 had been “more demanding than expected”, with the retail business impacted by lackluster consumer sentiment in the United States and Europe.

“Despite this market condition, we are encouraged by the number of new customers attracted to us for the scale and depth of our operations.

“We believe the trend for outsourcing will continue as more and more retailers and fashion brands appreciate the competitive advantages offered by one-stop-shop supply chain solutions,” Rockowitz added.

Reduction in Number of Brands in U.S.

The results come as no surprise after Li & Fung in January warned of a 40% drop in 2012 core earnings. And in August last year it hinted that the turnaround of its U.S. business was taking longer than expected.

Partly to blame is a reduction in the number of brands distributed in the United States, including a change to a deal to supply merchandise to Walmart overseas stores.

The group’s three business networks–Trading, Logistics and Distribution– accounted for 70%, 2%, and 28% respectively of revenue in 2012.

The distribution network, which offers wholesale distribution, including design and products globally via LF USA and LF Europe, slipped to a loss of $38.9 million from a core operating profit of $299.1 million a year earlier.

“The distribution business performed weakly in 2012, which was the main factor taking the group as a whole off its profit growth trend-line,” said Li & Fung group chairman Dr. William K. Fung.

“To ameliorate this anomaly, we will continue to adjust our business model and seek out new opportunities. At the same time, we are encouraged by the prospects for our logistics business whose customer base is growing nicely.”

The company also said it is “confident” that it will continue to expand its business in Asia through LF Asia, and is continuing to look for strategic acquisition opportunities to complement its organic growth.

 

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