By  on August 13, 2013

HONG KONG — Sourcing giant Li & Fung Ltd. said Tuesday it saw sharply lower first-half profits amid a “challenging” retail environment in the U.S.

The company said first-half net profits attributable to shareholders fell 69 percent to $96 million because it booked $198 million in extraordinary gains in the year-earlier period. Excluding the noncash gain, net profit attributable to shareholders decreased by 15 percent, the company said.

Core operating profit for the six months ended June 30 inched up 1 percent to $223 million. Sales were flat at $9.13 billion.

Despite the profit decline, Li & Fung’s shares rose 1.4 percent on the Hong Kong Stock Exchange to close at 10.54 Hong Kong dollars, or $1.37 at current exchange.

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Li & Fung reiterated its target to return to 2011 operating levels by the end of 2013. The company said that its business has become increasingly seasonal and skewed toward the end of the year because of a change in the business mix toward wholesale and distribution.

At a press conference Tuesday, Bruce Rockowitz, Li & Fung’s president and chief executive officer, said that the market outlook remains “relatively uncertain,” but forecast core operating profits would be three or four times greater in the second half. The U.S. market appears “solid,” but the company remains cautious on the U.S. overall and doesn’t expect to see any big pickup in business until unemployment rates decline. He said the company is adopting a “wait-and-see attitude” with the back-to-school and holiday seasons.

Rockowitz also said the company has “turned the corner” on its LF USA restructuring and is “happy with where the operations are right now.” He reiterated that the restructuring integration efforts are “on track” to be completed by the end of the year. The company said earlier this year that it has been actively eliminating smaller brands with less potential.

Looking at other markets, Rockowitz said Tuesday that Europe has been weak, but Rockowitz said there have been “somewhat encouraging” signs, especially in the U.K. and Germany in the last two to three months.

He described Asia as a “bright spot,” with Southeast Asia and China both doing well. China’s slowdown has been well-documented, particularly in the luxury end of retail, but Li & Fung is not active on the luxury end and thus continues to see growth.

The U.S. remains the largest and most important market to Li & Fung — 61 percent of its revenue came from the U.S. in the first half — but the company has diversified its revenue base geographically in the last three years, Rockowitz said. Asia now contributes 14 percent of total revenue.

On sourcing, the company said China remains the key country, but is not the key one for apparel. Bangladesh and Vietnam were the second and third top production companies, followed by Indonesia, India and Turkey. Rockowitz said he expects prices to be more stable than in past years.

He also noted an increase in worker safety and vendor compliance in the wake of the Bangladesh worker tragedies. Li & Fung became a founding member of the Alliance for Bangladesh Worker Safety’s advisory board a few weeks ago.

Li & Fung made five acquisitions in the first half, the biggest of which was Whalen Furniture, a U.S. home furnishings company. Other acquisitions include Chuan Jui Group, a Taiwanese transport company; the Four Star Group, a Macau-based pharmaceutical and medical device distributor; Group A Ltd., a U.K.-based beauty point of sales business, and RM Enterprises Group, a character licensing company.

Li & Fung’s shares are down about 25 percent year to date. In March, the company warned that it would miss its three-year profit target as 2012 net income fell by 9.4 percent because of trouble in the U.S. business.

Li & Fung had targeted $1.5 billion in operating profit by 2013, but abandoned that target after it become apparent that its restructuring costs in the U.S. would be greater than expected.

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