Li & Fung First Half Profit Falls 70% with “Sluggish” U.S. Market

Li & FungHong Kong—Li & Fung Ltd., which is billed as the largest supplier of clothes and toys to retailers, reported Monday that its first half profit was down 70% due to sluggish demand in the United States, its largest market.

Nonetheless, the sourcing giant predicted that its second half will be improvements—“the worst is over.”

“Following a disappointing year in 2012, we believe the worst is behind us, and we are on track to recovery in 2013,” Chairman William Fung said.

For the six month ended June 30, Li & Fung said net profit fell to $96.4 million compared to $312.3 million in the same period in 2012. Analysts’ average estimate expected a profit of $150 million. Net revenue was flat at $9.13 billion.

Excluding the effect of a $198 million one-time accounting gain, net profit would still be down 15%, the company reported.

“While the US retail environment is tracking with the slow pace of economic recovery, it has remained challenging,” the company said. Its retail customers have had a “more cautious view toward their winter sales this year.”

‘Pointless Looking at First Half Numbers’

Core operating profit rose 1% to $223 million. Second-half core operating profit will be 3 to 4 times that of the first half, according to CEO Bruce Rockowitz. “The U.S. is showing signs of recovery but we still remain cautious,” Rockowitz said, noting that weakness in consumer spending continues to hinder sales in Europe.

Another hindrance for the company has been its switch in strategy three years ago to turn its business more into a brand management business. As a result the company has made a series of acquisitions: 10 in 2012 alone. During the first half of this year, it spent about $432 million on five more acquisitions.

That buying spree is likely to continue, too. Fung said the company has about $400 million in cash and is seeking more acquisitions overseas.

Furthermore, the company is still amid a restructuring of its U.S. distribution business which Rockowitz said is “progressing well” and should be completed by the end of the year.

Although the U.S. retailers account for about 61% of its volume, Li & Fung is cautiously building Asian retail business.

“While we continue to build out our Asia wholesale and distribution platform with key retail customer relationships, we are also taking a more cautious approach in our expansion plan given the recent slowdown in the China market,” the company said.

“It’s almost pointless looking at the first half numbers,” wrote Nicholas Studholme-Wilson, an analyst at Sun Hung Kai Financial. “Probably 90% of the distribution business occurs in the second half of the year, so all the sales you are seeing at the moment are pretty much from their trading business. It looks fine to me. To me this is about a margin improvement story.”

 

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