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Li & Fung Profits Rise 13 Percent

Hong Kong-based sourcing giant Li & Fung Ltd. posted double-digit profit growth in the first half despite weak market conditions.

HONG KONG — Hong Kong-based sourcing giant Li & Fung Ltd. posted double-digit profit growth in the first half despite weak market conditions.

The company said Thursday profits attributable to shareholders for the six months ended June 30 rose 13 percent to 1.40 billion Hong Kong dollars, or $180.6 million at average exchange rates.

Sales shed 2 percent to 46.29 billion HK dollars, or $5.97 billion, as weak consumer demand and some customer insolvencies bit into business.

“I’m very happy to report a double-digit net profit growth despite a very challenging environment,” said managing director William Fung. “The first half of this year and the last half of 2008 were probably two of the most difficult periods the global economy has ever experienced. In terms of consumer goods and global trade, we have not seen such difficulties for as long as I can remember, so it’s quite gratifying that despite all of that, we still managed to obtain double-digit growth.”

The company reported a lift in core operating profit, up 11 percent to 1.70 billion HK dollars, or $219.3 million. Fung attributed this to cost cutting and acquisitions and said the same will hold true for the second half of the year. “If there’s growth, it will really rely on acquisitions — not organic growth,” he said. “This lull in the market [makes it] tough going for our existing and current business, but it’s a really good opportunity, too. It’s the perfect time to buy companies to fill up space, to build. In that respect, we’re very optimistic.”

Li & Fung has a $1 billion war chest for such acquisitions. Earlier this year, the company acquired U.K.-based footwear maker Shubiz along with its sourcing arm Clearskies, as well as JMI, a maker of gloves and technical clothing for brands like Burton and Nike. Li & Fung also signed sourcing deals with Liz Claiborne Inc. in February and in April became the exclusive sourcing agent for the apparel arms of Wolverine and Merrell.

“Outsourcing deals were the main activity of the first half,” said Fung. “Our customers usually have their own buying offices, but they’re closing [them] and we take over the business,” he said.

In that vein, the company said it has entered into a buying agency agreement with Boston-based The Talbots Inc., which has 600 stores across the U.S. Li & Fung will now act as exclusive apparel sourcing agent for all Talbots brand apparel, and the nonexclusive agent for swimwear, intimate apparel, footwear, jewelry, handbags and accessories. Fung says the deal is worth between $300 million and $400 million this year. The agreement goes into effect in September.

Fung also elaborated on which markets were providing further potential acquisitions. “We see opportunity in the U.S. The companies are suffering and the banking system is lagging. A lot of companies do want to sell to us. Europe is starting to follow and our own home base, Asia, is where we’re looking at export companies to find certain product categories,” said Fung, who specified health and beauty as the one area in which Li & Fung is relatively under-represented.

Fung also said he expects the U.S. to lead the way in economic recovery, but could not predict when that might happen. “Back-to-school sales are very important. July numbers didn’t show anything; it’s the August numbers that are important,” he said, noting that if sales begin to increase, retailers will have to place more orders to counter currently low stock levels. “They’ll have to bring stock levels up a bit — that’s the part, the upward lift we’re looking for.”

Fung also pointed out that while turnover in terms of markets and products remained relatively unchanged, there has been a shift in which countries Li & Fung sources. China once again accounts for 50 percent of goods, but the location of the manufacturers has changed. “China has shifted. It was the Pearl River Delta and the Shanghai Yangtze River Delta, but we see a move to the hinterland and the interior. There is a geographic shift,” said Fung, noting the central government’s support of such changes.

Elsewhere, sourcing has dropped significantly in Thailand, down 22 percent, and Turkey, down 37 percent, as costs in those countries continue to rise. On the other hand, one country is emerging as a power player. “Bangladesh is the major star of the first half,” said Fung, who pointed out an increase of 34 percent in sourcing from the Southeast Asian country.

Separately, Fung declined to comment on whether men’s wear retailer Trinity is planning an initial public offering. The retailer is privately owned by William and Victor Fung and controls seven high-end men’s wear brands as well as more than 430 monobrand stores across China. The brands include Cerruti 1881, Gieves & Hawkes, Kent & Curwen and D’urban. Trinity also operates 35 Salvatore Ferragamo stores in South Korea, Singapore, Malaysia and Thailand through a joint venture. One Hong Kong newspaper has reported that Trinity aims to raise at least $200 million in a Hong Kong IPO by the end of this year.

Fung did confirm that Jean-Marc Loubier has joined Trinity as a director. Loubier is the ex-chief executive officer of Escada and formerly held management positions at LVMH Moët Hennessy Louis Vuitton.