A difficult global economic and retail scene brought down sales and profits at Li & Fung, but the company said it was poised to rebound on a refocusing of its business.
In a Nutshell: Li & Fung Limited, among the top sourcing and supply chain countries in the world, said it was affected by a challenging macroeconomic and retail environment in the first half of the year, which saw continued destocking, store closures and bankruptcies.
The strategic divestment of its three Product Verticals–furniture, beauty and sweaters–was completed in April. The divestment was in line with Li & Fung’s strategy to simplify its business and allow senior management to focus resources on growing the core business of Supply Chain Solutions, helping customers manage the changing retail environment and delivering its Three-Year Plan goals.
The company said it maintained a strong balance sheet and maximum flexibility in its capital structure, aided by redeeming the $500 million perpetual capital securities and the strategic divestment of the three Product Verticals. This raised $1.1 billion and returned $520 million to shareholders through a special dividend.
China business continued to lead the way, benefitting from an upsurge of domestic consumption, especially in e-commerce. The Rest of Asia operations performed well, and new markets such as South Korea, Japan and India also recorded “impressive results,” Li & Fung said.
The company said it has decided to seek a separate listing of its Logistics unit on the Hong Kong Stock Exchange and is expected to remain as the controlling shareholder of the Logistics business and continue to consolidate its financial results post spin-off listing. The listing is expected to take place in the first half of 2019.
Sales: Turnover in the first half ended June 30 fell 9.6% to $5.85 billion from a year earlier, as total margin as a percentage of turnover was 10.5%. The Logistics business saw turnover increase 10.9% to $543 million from a year earlier.
Earnings: Core operating profit in the half decreased 18 percent to $124 million from the year-ago period, due largely to the decrease in turnover and total margin in the Supply Chain Solutions business given the shifting retail environment and customer destocking trend. Core operating profit in Logistics rose 15.1% to $38 million.
Operating costs were flat at $489 million, as operational efficiency and productivity gain in Supply Chain Solutions were offset by the increase in operating costs in the Logistics business to support its expansion and organic growth. Operating costs in Supply Chain Solutions decreased 9.8%, benefiting from the roll out of the digital modules and productivity measures.
CEO’s Take: Spencer Fung, Group CEO of Li & Fung, said: “Our Logistics business has grown double digit every year since it became part of Li & Fung at the end of 2010. It continues to benefit from the tailwind of rising middle-class consumption in Asia, e-logistics, geographic and vertical expansions.”
“We have announced an aggressive plan to bring greater focus on customers, business development, production platform and digital initiatives. Our speed and digital modules have helped our customers achieve better operational results by increasing sell-through, reducing mark-downs and improving inventory levels, and we want to accelerate our digital strategy.”
Group chairman William Fung added, “With global trade threatened by the U.S.-China trade war, our model of dispersed production in over 50 countries is holding strong. Our breadth and long-term relations in these markets is one of our core competences and strengths in our traditional sourcing business. Additionally, we have accelerated our investment in our digital strategy and we will deliver a fully integrated digital platform connecting suppliers, customers and other partners with end-to-end visibility and data analytics.”