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Li & Fung Eyes Possible Brand Spin-off

The company posted a 17 percent increase in net profit for full-year 2013, helped by a turnaround in the group’s LF USA business.

By
with contributions from Payal Uttam

HONG KONG — Li & Fung Ltd. posted a 17 percent increase in net profit for full-year 2013, helped by a turnaround in the group’s LF USA business. The company also revealed a possible spin-off of its global brands and licensing business on the Hong Kong Stock Exchange.

Li & Fung’s net profit for the 12-month period ended in December totaled $725 million, while revenues increased 3 percent to $20.7 billion.

The company said that preparation for the proposed spin-off is under way, and that it aims for a listing later this year. If approved, Bruce Rockowitz, Li & Fung’s group president and chief executive officer, will become ceo of the Global Brands Group. Spencer Fung, currently chief operating officer, would take over as ceo of Li & Fung.

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“We feel by having two separate public companies, each one can focus on its roots and what it does right and what it does best,” Rockowitz said at a press conference Thursday.

“When you look at Li & Fung, we were historically a sourcing company. We developed a branding business because we wanted to develop the top 10 retailers in the United States. Our core is taking care of other people’s brands. It’s less volatile,” he explained.

The brands business, on the other hand, “has gone through a difficult time,” he acknowledged, but Li & Fung has built up a “great” portfolio and “we hope to make sure that the things that went wrong in the past don’t go wrong in the future. It is more volatile, but it’s a higher-margin business, so I think it’s an opportunity for investors to make their decision,” he continued.

Li & Fung’s trading network, its largest business unit, making up 62 percent of overall profit, reported a 1 percent increase in revenue, totaling $16.3 billion. The unit’s core operating profit rose 3 percent to $539.4 million.

The trading network business depends heavily on Chinese factories, which analysts say has become a source of concern, given rising labor costs. Rockowitz acknowledged rising operating costs in China but said that the country would continue to be a key market.

“China is developing; it’s moving from the coast into the interior. And I can say that, while some factories are definitely moving out of China, they are also moving to the interior of China, and they keep reinventing themselves,” he said. China is the largest market for sourcing, while Vietnam is the second largest and Bangladesh is third.

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Li & Fung’s other two major business units, its distribution network and logistics network, also reported improvements in core operating profit and revenue.

The distribution network, which includes LF USA, reported core operating profit of $295.5 million, against a loss of $38.9 million the previous year. Li & Fung said the LF USA business “recovered and produced positive results through margin expansion and cost control.”

Core operating profit at the company’s logistics network unit jumped 50 percent to $35.8 million. Revenues rose 30 percent to $526.3 million, thanks to gains from partnerships plus new business.

Li & Fung noted it had “emerged stronger following a challenging 2012” and that it returned to 2011 operating levels.

“It wasn’t a very strong economic environment in 2013 and that was really the overriding theme, at least economically. In fact, if you go back to October, that was after back to school, that was quite poor, then the U.S. government had a shutdown and that time we were very concerned and we became, I’d say, more pessimistic about the year. We made up a lot of ground in the second half of the year in 2013,” Rockowitz said.

Looking forward, he said he is somewhat positive, noting that “the market itself has been incrementally better overall and slowly getting better, but it’s still not robust.”

The Hong Kong-based company also released a new three-year plan, emphasizing organic growth and investments in its operating platform and infrastructure. Under the plan, Li & Fung’s trading network aims to achieve a core operating profit that exceeds the company’s entire current core operating profit. The firm also aims to double the core operating profit of its logistics business.

Rockowitz highlighted that the company would be putting less emphasis on acquisitions in the future.

“When you look at the past three-year plans, we’ve done a lot of acquisitions, no doubt. Now we have our platform, we have scale in many areas; now we are in a position to leverage what we have and grow organically. Our three-year plan is really based on organic growth. Having said that, there will be some acquisitions.”

Li & Fung made 10 acquisitions in all of 2013 — a “relatively small” number for the company. So far in 2014, the company acquired The Licensing Company Limited, a global licensing agent in Europe.