EARNINGS

Li & Fung

Li & Fung 'past worst' in turnaround push

Chairman William Fung says the global trader is looking to a recovery in core US business by year-end after suffering 69pc fall in first-half profit

PUBLISHED : Tuesday, 13 August, 2013, 10:14am
UPDATED : Wednesday, 14 August, 2013, 3:31am

Li & Fung, the world's largest supplier of goods to global retailers including Wal-Mart and Target, insisted the worst was behind it as it posted a 69 per cent drop in first-half net profit and said it remained hopeful of a recovery in its core US business by the end of this year.

Net profit of US$96 million for the six months to June 30 was well below market consensus forecasts of US$106.3 million, but the firm pointed to a 1 per cent rise in interim core operating profit to US$223 million as a sign of underlying improvement, along with a 4 per cent rise in total margin to US$1.37 billion.

"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 Kwok-lun said in the results statement.

Investors remain to be convinced, having sold the company's stock steadily this year, wiping 23 per cent off its market value by yesterday's close, when the shares ended the session at HK$10.54. The blue chip Hang Seng Index has fallen just 0.5 per cent over the same period.

Li & Fung reported interim net profit of US$312 million a year ago, which included a non-cash gain of US$198 million on the write-back of contingent considerations. Excluding such non-cash gains, profit attributable to shareholders fell by 15 per cent for this year's first half, the company said.

The big drag on the company's business remains the lacklustre performance of the United States, where the clothes-to-furniture sourcing powerhouse generates about 60 per cent of its sales. It has been restructuring operations there, centralising merchandising, planning and integrating back-office functions in an effort to slash costs and boost efficiency.

"Management is focused on making a turnaround by the end of 2013," the results statement said of the US business, while acknowledging the still challenging trading conditions in its single largest market.

The firm said global economic conditions remained tough, although the price environment had stabilised compared with last year, with the price deflation trend becoming more subdued through the course of this year.

"Our business continues to demonstrate a stable performance amidst an uncertain macroeconomic environment, especially in Europe," it said.

Europe accounts for about 18 per cent of Li & Fung's turnover.

Li & Fung has been guiding investors to expect core operating profits for this year at US$880 million, of which more than three-quarters are expected to come in the second half, analysts said before the results were announced.

The company said the evolution of its business meant the second-half skew would become even greater. The increased scale of the wholesale and distribution business, combined with seasonal effects of back-to-school and holiday buying patterns would further compress orders, lead times and shipments, it said.

"We expect the proportion of sales and earnings recorded in the second half of the year to continue to increase in the future," the statement said.