Li & Fung

Li & Fung expects 2012 core operating profit to drop 40pc

Analysts say earnings forecast is worse than expected while the sourcing company blames it on restructuring costs and provisions in the US

PUBLISHED : Saturday, 12 January, 2013, 12:00am
UPDATED : Saturday, 12 January, 2013, 4:02am

Li & Fung says net profit for last year will not exceed that of the previous year and core operating profit will in fact drop 40 per cent, worse than analysts' estimates.

"This is worse than I expected. Obviously it's a negative for the company," said Nomura analyst Tanuj Shori.

Although the net profit of Hong Kong's largest supply chain firm grew 33 per cent in the first half of last year, it would not increase for the whole year, the company said yesterday. "The company's efforts to improve the second-half results will not achieve an improvement in core operating profit, and core operating profit is expected to be lower by approximately 40 per cent."

A JP Morgan report in November forecast Li & Fung's net profit to grow 16.3 per cent last year. However, a Bloomberg consensus estimate said it would fall 9 per cent to US$619.5 million.

There is no way Li & Fung will meet its target of a core operating profit of US$1.5 billion this year, more than double its core profit in 2010, Credit Suisse analyst Gabriel Chan said.

In September last year, Li & Fung chief executive Bruce Rockowitz said: "We remain committed to our three-year plan's core operating profit target of US$1.5 billion."

In November, Rockowitz said that even if the company missed the target, the gap should not be great.

Given the company's core operating profit of US$882.1 million in 2011, a 40 per cent drop would translate to US$529.3 million, well below a Bloomberg consensus estimate of US$885 million.

Chan said: "It's worse than I expected. Core operating profit is more important than net profit. Down 40 per cent, that's really bad."

The drop indicated the company's profit margin in its distribution business had not improved or might even have worsened, he said.

Li & Fung attributed the decline in core profit to restructuring costs and provisions in its subsidiary in the United States, LF USA, as well as the reduction in the number of brands distributed in the country.

LF USA president Richard Darling was replaced by Dow Famulak on December 19.

The US accounted for 62 per cent of Li & Fung's revenue in the first half of last year.

This year, the US economy was expected to slow from its current 2 per cent annual gross domestic product growth to 0.5 per cent or even slip into recession because of deals to resolve the fiscal cliff, said Martin Feldstein, an economics professor at Harvard University.

"We are going to see weaker growth in 2013 than in the last two years. The US household sector is not going to be a source of strength," Feldstein said at an Asia Society lunch talk yesterday.

Real wages had not risen in the US in the past year, and one in six Americans were not working full-time, higher than the official US unemployment rate of 8 per cent, he said. "We got a lot to worry about."

Chan said this year was going to be tough for Li & Fung as sourcing from the mainland was no longer cheap and the yuan would appreciate.

The mainland accounted for 56 per cent of the firm's sourcing in the first half of last year.