HONG KONG — Li & Fung Ltd. said Wednesday that effective cost controls and timely acquisitions resulted in a 39 percent increase in profit attributable to shareholders to 3.37 billion Hong Kong dollars, or $434.6 million, on a 6 percent decline in sales to 104.48 billion Hong Kong dollars, or $13.48 billion, in the year ended Dec. 31.
This compares with profits of 2.42 billion Hong Kong dollars, or $311.1 million, on sales of 110.72 billion Hong Kong dollars, or $14.22 billion, the previous year. All currency conversions were made at average exchange rates for the respective periods.
Group managing director William K. Fung attributed the company’s results in one of the “worst years of trading history” to the drastic measures taken to slash operating costs and the growing onshore business in the U.S. and Europe.
“Turnover declined due to overall market weakness and we lost a lot of our larger clients due to bankruptcies such as Woolworths and Arcandor,” he said. “This was exacerbated by very weak consumer sentiment that led to an overall price deflation of about 9 percent. But we fought against this by turning our attention to acquisitions and sourcing deals in order to gain market share. Many analysts thought this was the wrong move to make given the economic environment, but we disagree. And this has paid off in spades.”
Earlier this year Li & Fung inked a major sourcing deal with Wal-Mart Stores Inc. As part of that deal, Li & Fung will set up a wholly owned subsidiary, which will act as a sourcing agent for the Wal-Mart group internationally, for both soft and hard goods. The contract will run indefinitely, at a minimum until 2016, with Li & Fung granting a call option to Wal-Mart. Fung forecasts a shipment of $2 billion in the first year alone.
Other major outsourcing deals signed during the year included ones with Liz Claiborne Inc.; The Talbots Inc.; The Hudson’s Bay Co., and Wolverine. In addition, the group made several acquisitions, the largest of which was Wear Me Apparel for about $100 million, plus contingency payments over the next five years.
There were no dramatic changes in the group’s turnover by market, with both the U.S. and Europe hovering around 30 percent of the company’s revenues, but Fung pointed out this might change with the Wal-Mart agreement. This deal will also increase the amount of hard goods produced, which currently account for 30 percent of the production pie.
Fung also said, in terms of sourcing, the biggest beneficiary of the tough economic market has been Bangladesh. The increasing labor costs in China and appreciating renminbi have allowed Bangladesh and Vietnam to become increasingly more competitive over the past year.
He also warned of the risk of a retreat into protectionism: “Political leaders, especially in the U.S., are beginning to put up trade barriers. President Obama has already imposed a tire tariff when if Bush were president, he would have vetoed such an act. Let’s hope President Obama won’t succumb to protectionism pressures as it could potentially lead to a trade war.”
This year marks the last in the company’s current three-year plan in which it sought to reach a turnover target of $20 billion. President Bruce Rockowitz said while the firm didn’t grow its top line this year, it did see bottom-line growth and that strong top-line growth should return in 2010.
Li & Fung is now beginning to see clients adjust their inventory levels to reflect an upmarket trend, but the speed and strength of the recovery is as yet known. Fung said that, while he is confident the market will bounce back, it would not reach 2007 levels.
Going forward, Li & Fung will continue to drive the cost base down and maintain operating leverage. “The platform is now set for strong growth and leverage,” Fung said. “We have a lot of deals in the pipeline. We have a lot of cash and will continue to invest into health and beauty, footwear and European onshore businesses.”