Troubled Distribution Business Weighs on Li & Fung’s 2012 Results

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Global sourcing expert Li & Fung reported fiscal 2012 results that reflected tepid consumer demand in the U.S. and Europe, a competitive pricing environment for the retail products it sourced, and a troubled U.S. distribution business unit. The results are in line with analyst’s projections after the firm issued a warning in January that core operating profits will likely decline by 40% in 2012.

Total turnover in 2012 was roughly flat at $20.2 billion as a moderate increase in sourcing volume was offset by price deflation. Core operating profits fell by 42% to $511 million, which the firm attributed to problems at LF USA, the distribution arm that struggled with a bloated brand portfolio and elevated costs. In sharp contrast to 2011, during which LF USA contributed nearly a third of total core operating profits, the unit posted losses of $39 million in 2012 due to restructuring costs.

Analysts expect the unit to remain a drag on overall profitability in 2013 as the newly installed management tries to clean up the portfolio and focus on large brands with significant revenue potential. The problems represent a setback to the firm’s strategic initiative to move up the value chain from sourcing into design and brand management, although the firm appeared committed to this path, with management insisting on the earnings call that the business model is correct but more efficiency is required.

Management also said on the earnings call that Li & Fung will unlikely hit its three-year-plan goal of increasing core operating profits to $1.5 billion in 2013. This is hardly a surprise to investors as the goal is aggressive. Investors are hoping 2013 will be a year of recovery, in which Li & Fung can grow turnover by 4%-5% due to acquisitions and post core operating profits of about $750 million.

 

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