Li & Fung Ltd., the world’s largest supplier of clothes and toys to retailers, reported first-half core operating profit slumped 20 percent amid weak demand from its customers in the U.S. and Europe.
Core operating profit fell to $182 million for the six months ended June from $227 million a year earlier, the company led by billionaire Chairman William Fung said in a statement Thursday. That compared with the $200 million average estimate of two analysts surveyed by Bloomberg.
“While we expect the macroeconomic environment to remain challenging for the rest of the year, our order book remains solid and in line with our expectations,” said Chief Executive Officer Spencer Fung in the statement. “I am optimistic that key prospects will be converted into new businesses this year.”
Li & Fung gets about 60 percent of its revenue from the U.S., where consumer confidence fell in July as a stock market slump amid weakness in China may have damped Americans’ views of the domestic economy. The rapid decline in the euro due to political uncertainty around Greece, and the slowing Chinese economy also affected the company’s business, it said Thursday.
The Hong Kong-based company, whose customers include Wal-Mart Stores Inc. and Target Corp., reported net income rose 33 percent to $149 million, while sales fell 1 percent to $8.63 billion.
Lower oil prices weren’t able to offset the general economic softness and retail sales in the U.S. remain lackluster as Americans use their savings from lower oil prices partly to pay down their debts and save the money instead, the company said.
The retail demand in the U.S. was largely boosted by heavy promotions, hitting Li & Fung’s customers and weighing on margins, the company said. It expects cyclical weakness to reverse as the euro zone resolves the uncertainty around Greece, it added.
Sales in the U.S were flat, while those in Europe and Asia, which each accounted for 16 percent of the total, dropped 13 percent and grew 14 percent, it said. Li & Fung’s margin fell 1 percent during the period.
Wal-Mart, the world’s largest retailer, said in May it pulled some of its goods sourcing business from Li & Fung, while Kate Spade & Co. will take sourcing for accessories in-house starting spring 2016.
Li & Fung’s relationship with Wal-Mart is still going “very strong,” CEO Spencer Fung said at a briefing in Hong Kong after the results were issued. The company sees the logistics business as its “high growth area” and is looking to expand in countries such as Australia and India, he added.
The company spun off its licensing and brand-management unit Global Brands Group Holding Ltd. in July 2014 to focus on its core businesses of sourcing and managing the supply chain of retailers.
China remains the largest sourcing market of the company, followed by Vietnam and Bangladesh, Li & Fung said.
Li & Fung shares fell 4.2 percent to HK$5.47 by the close of trading in Hong Kong. The benchmark Hang Seng Index dropped 1.8 percent.
(Corrects sales to a drop instead of a gain in fifth paragraph and Asia turnover growth percentage in eighth paragraph in a story that was published Thursday.)