Li & Fung warns of tough second half after 9pc fall in core operating profit

PUBLISHED : Friday, 22 August, 2014, 1:21am
UPDATED : Friday, 22 August, 2014, 1:21am

Li & Fung, the world's largest sourcing company, reported a 9 per cent decline in core operating profit to US$227 million in the first half of the year and the firm expects a tough second half in the United States, which is still its key export market.

"Core operating profit margin decreased from 2.9 per cent to 2.6 per cent in the first half, mainly as a result of strategic additional expenditure on people, infrastructure and service initiatives," the company said in a statement. The pressure on core operating profit margin came from increased investment in the first year of the company's three-year plan, aimed at boosting its profits by 2016.

Traditionally the company performs better in the second half. But this year, that may not be the case as retail sales in the United States, which contributed 60 per cent of its total turnover, are expected to be weak in the period.

"Some big retailers have released their results earlier this week. Many of them said the second half would be quite tough," said Spencer Fung, who spoke as the company's chief executive for the first time at its results briefing. "But our businesses still have growth and our order book is still healthy."

American supermarket giant Wal-Mart Stores, a customer of Li & Fung, cut its forecast for full-year earnings from continuing operations to US$4.90 to US$5.15 per share from US$5.10 to US$5.45 earlier this month, citing higher costs and increased investment in its online business.

Total turnover of Li & Fung increased 3 per cent to US$8.7 billion in the first half. Net profit jumped 45 per cent to US$201 million, due to a non-cash gain of US$98 million, mainly from contingent considerations.

The core operating profit of its trading network declined 11 per cent year on year, due to increased operating costs, mainly from Whalen Furniture, which Li & Fung acquired in 2013. The core operating profit of its logistics network increased by 31 per cent, partly due to the acquisition of China Container Line, the company said.

Li & Fung declared an interim dividend of 13 HK cents per share. The firm completed spinning off its consumer brands business, Global Brands Group, in July. Global Brands posted a first-half core operating loss of US$63 million, compared with a loss of US$25 million a year ago, affected by heavy seasonality in the business and one-off expenses of US$31 million associated with the listing.

Global Brands chief executive Bruce Rockowitz said he expected profits to be skewed more towards the second half of the year. The consumer brands business generated 60 per cent of its top line from the second half due to the addition of new brands. Global Brands' dividend payout ratio would be much lower than Li & Fung's, Rockowitz added, as it was focused on high growth.