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Li & Fung Overspend in U.S., Fail to Meet $1.5 Billion Target

As we settle into the new year, our Sourcing Summit Companion Report looks ahead at ways to optimize processes and performance.

Hong Kong’s Li & Fung Limited, major players in the international sourcing and distribution industry, announced a 9.4% drop in net income, reportedly due to unexpectedly high restructuring costs in 2012.

Revenue was flat at $20.2 billion. Sales in Europe were down 12%, but the U.S. was up 5%. Their final dividend was 2.05 cents per share, down 53% from 2011.

The restructuring of the company’s U.S. operations has faced extensive challenges–read, expenses–and Bruce Rockowitz, Li & Fung’s president and CEO, told Forbes that December 2012 brought significant managerial changes to the company, including replacing Richard Darling with Dow Famulak as president of LF USA. “We’ve now been in a restructuring mode,” he said, adding the Li & Fung will focus on its U.S. business, core key brands, and is “trying to stay away from smaller brands”

The company also cited higher gasoline prices, increased payroll taxes, and cuts to federal spending in explaining its $617 million net income — down from an estimate of $671 million.

LF plans to reduce acquisitions and intends to move away from using acquisitions to boost growth. They have spent about $3 billion on deals since 2006, including the purchase of Integrated Distribution Services Group in 2010, which Bloomberg reports say drove up profits and sales in the five-year period. Instead of pushing acquisitions as a general policy, the company will strategically focus on European deals.

The firm raised $502 million last year in its biggest public offering since listing shares in 1992. They booked $326 million in writebacks on acquisitions in 2012, and Rockowitz says the company has about $1 billion more to spend on acquisitions. In a troubling sign for the acquisitions strategy, core operating profit declined 42% from 2011, which dragged margin down to 2.5%.

The company also saw a $38.9 million operating loss in its distribution unit, which handles branding and licensing for retailers. LF USA, the United States branch of the distribution unit, was hurt by lower margins and higher costs. The company changed management at the unit mid year and Rockowitz predicts it will be profitable in 2013.

Back in 2010, Li & Fung had projected $1.5 billion in operating profits for 2013; now the company cautioned investors and analysts that this goal may not be obtainable. Rockowitz told Hong Kong reporters that the company’s new goal is to “get back to 2011 levels.”

Despite the drop in net income, revenues did rise in 2012–though only by 1%.

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