Li & Fung Says it Will Miss Three-Year Target for Profit

Li & Fung Ltd., the world’s largest supplier of clothes and toys to retailers, said it will miss its 2013 profit target after net income dropped for the first time in four years as a sluggish U.S. economy damped demand.

Li & Fung will “miss the three-year plan,” Bruce Rockowitz, chief executive officer, told reporters in Hong Kong yesterday. He had set a goal in 2010 of $1.5 billion operating profit for 2013.

The supplier to Wal-Mart Stores Inc. and Target Corp. gets about 60 percent of its revenue from the U.S., where an increase in payroll taxes, higher fuel costs and federal spending cuts have hurt consumer confidence. Net income fell 9.4 percent from a year earlier to $617 million for 2012, missing the $671 million average of 17 analysts’ estimates compiled by Bloomberg.

Li & Fung gained 1.7 percent to HK$10.74 at the close of trading in Hong Kong, compared with a 0.5 percent drop in the benchmark Hang Seng index.

The company booked a $38.9 million operating loss for its distribution unit, which licenses and supplies brands to retailers. LF USA, the distribution business in the U.S., was also hurt by higher costs and weaker margins.

“We had issues in the way we operated it, in the way we managed it,” Rockowitz said of LF USA. The company has changed management and is working to revive margins at the unit, which will be profitable this year, he said.

It moved some jobs from New York to Asia last year, he said in an interview.

Direct Sourcing

The company, which traces its beginnings to 1906 when parent Li & Fung Group was founded, supplies U.S., European and Asian retailers with clothes, toys and furniture.

“A lot of focus this year will be on less hiring,” Rockowitz said, referring to the company’s measures to cut costs. Li & Fung usually hires 1,000 people a year worldwide, he said, without specifying how many it will hire in 2013.

The company hasn’t lost customers at the sourcing unit, with only a “handful” opting to source directly, Rockowitz said. Its sourcing business for Wal-Mart “is steady,” he said in an interview. “We haven’t seen any contraction at all.”

Li & Fung has relied on acquisitions to boost growth, spending about $3 billion on deals from 2006 to 2011, including the purchase of Integrated Distribution Services Group Ltd. in 2010, driving up both sales and profit in the five-year period, according to data compiled by Bloomberg.

The company “won’t use acquisitions to pad up sales,” Rockowitz said. It will consider “strategic” deals in Europe, he said.

The supplier in March last year raised HK$3.9 billion ($502 million) in its biggest share sale since listing in 1992. Rockowitz in August said the company has the “firepower” to spend as much as $1 billion on acquisitions.

The company booked a $326 million writeback for 2012 related to acquisitions, according to a presentation following the earnings statement. The company had said in January that 2012 net income was “unlikely to exceed” the year earlier profit, without giving a figure.

Core operating profit slumped 42 percent from a year earlier to $511 million, according to the statement. The decline dragged margin, or core operating profit as a percentage of revenue, down to 2.5 percent.

(Updates with closing share price in fourth paragraph)
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