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Li & Fung Hit by European Economy, Eyes Deals

The same economic turmoil that pushed operating profits down 21.6 percent in the half is opening opportunities in Europe for the sourcing giant.

The same economic turmoil that hurt Li & Fung in the first half — pushing operating profits down 21.6 percent — is also opening opportunities for the sourcing giant to acquire more European businesses.

Bruce Rockowitz, group president and chief executive officer, told WWD that Europe still has “a few more years” before it works through economic troubles, which he likened to a slow-motion version of what happened in the U.S. after the 2008 Lehman Brothers collapse.

That’s a double-edged sword for the company, which saw 18.4 percent of its revenues come from Europe in the first half.

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“Just like in the U.S. in 2008 and 2009, there’s a lot of opportunity in Europe for good companies that need, maybe, a stronger partner,” Rockowitz said. “We’re definitely looking there.”

Li & Fung would also like to add to its four-and-a-half-year-old beauty business, which already has sales of $1.2 billion.

Not all the firm’s past deals have performed as well as they might have, given the business climate.

Li & Fung booked $198.3 million in “noncore operating” gains as it reduced the provisions set aside for performance-based payouts related to the 2010 acquisitions of U.K. private label apparel supplier Visage Group and Hong Kong-based jeanswear company HTP Group. That pushed the sourcing giant’s first-half net profit up 32.6 percent to $312.3 million from $235.5 million.

However, core operating profit declined to $221.5 million from $282.4 million. The company said it was impacted by a slower-than-expected turnaround of its U.S. business as well as an investment in its Asia fashion and home unit.

Rockowitz said the company has been working on ways to reduce its operating costs and to improve margins by sourcing in new areas. Investors in Hong Kong apparently approved of the firm’s plans, pushing Li & Fung’s stock up 2.7 percent to 15.92 Hong Kong dollars, or $2.05, on an up day for the market.

Li & Fung’s sales for the six months ended June 30 grew 3.7 percent to $9.13 billion from $8.8 billion.

First-half sales in the U.S. rose 11.3 percent to $5.67 billion, buoyed by acquisitions including children’s apparel company Fishman & Tobin, costume jewelry maker Crimzon Rose and Loyaltex Apparel.

Revenue in Europe declined 13 percent to $1.68 billion on “weaker overall consumer sentiment,” the company said.

The firm noted that it is making inroads in Asia. Sales in China rose 5.6 percent to $555.5 million while those in the rest of Asia dipped 0.3 percent to $599.3 million.

William K. Fung, group chairman of Li & Fung Ltd., said the company is sticking to its plan.

“The economic environment may have worsened since the goals [of the company’s three-year strategic plan] were set two years ago, but we are making necessary adjustments to our operations and taking advantage of acquisition opportunities,” he said. “We remain committed to striving for our target of [$1.5 billion] in core operating profit by 2013.”

Already this year Li & Fung inked four deals. It acquired electronic surveillance tag provider Algreta Solutions; costumes and party supplies company Palamon (International) Ltd.; youth cosmetics and personal-care player Added Extras LLC, and handbag and accessories maker Dragon Concept HK Ltd. It also signed licensing agreements for Geoffrey Beene men’s sportswear, Nautica dress shirts and the Narciso Rodriguez collection for Kohl’s Corp.