HONG KONG — “Deflation is here to stay.”

This story first appeared in the November 10, 2008 issue of WWD. Subscribe Today.

So said William Fung, global managing director of Li & Fung Ltd., who said Wednesday that the sourcing giant is budgeting for flat growth in 2009 because its customers are predicting 10 to 20 percent decreases in sales.

“I’d be remiss if I said things looked rosy,” said Fung as the group unveiled 2008 results that showed a decline in operating profits.

Offsetting what is expected to be a tough 2009 is an increase in Li & Fung’s outsourcing market share. “We expect to emerge stronger, to take a lot of market share,” said Fung. “It’s been a busy year. The silver lining in the economic situation is that we have more retailers coming to us because they are asking, ‘Is having our own sourcing office the right way to go?’ 

“There is no doubt that consumer sentiment is very weak, but the group continues to gain significant market share through an accelerated flow of outsourcing deals,” continued Fung, listing Timberland’s apparel business, Mexx, and Toys ‘R’ Us private label business as examples of gained market share in 2008.

The trend is continuing in 2009. In February, Li & Fung signed a deal to do the sourcing for all of Liz Claiborne’s brands, including Juicy Couture, Kate Spade, Lucky Jeans, Dana Buchman and Mexx. Fung called the agreement a “landmark deal. It puts us at the top of the line for any branded companies looking for sourcing. The market is buzzing with this.”

In the meantime, Li & Fung is spending considerable effort trying to diversify. While America still accounts for the lion’s share of the company’s market, 62 percent in 2008, that is a decrease of 3 percent from 2007. “We are steadily reducing our reliance on the U.S. market,” said Fung. Similarly, the company’s turnover in soft goods or apparel decreased 3 percent in favor of hard goods.

The company also is looking for further acquisitions. In 2008, the group made two large acquisitions: Van Zeeland handbags in the U.S. and Miles Fashion from Germany, which Fung expects to become an anchor business for Li & Fung in Europe. “Miles’ main customer is Aldi, which is like Wal-Mart in the U.S.; it’s really growing now,” he said.

“We look at acquisitions as opportunistic,” said Fung, who explained that the company keeps a $100 million fund on hand for smaller deals. He said, “2009 will be challenging, but we want to make deals.”

For 2008, Li & Fung reported a 3 percent decrease in operating profit to 3.08 billion Hong Kong dollars, or $396.1 million, as well as a decrease in net profit, down 21 percent to 2.42 billion HK dollars, or $311.1 million. Earnings per share were also down, by 23 percent, compared to 2007.

The only bright spot, according to Fung, is the strong growth in turnover, which reached $110.72 billion HK dollars, or $14.2 billion, a 20 percent increase over last year.

“It was a difficult year for export and consumer businesses, even before the financial crisis hit. Happily in top-end sales we increased market share, and turnover growth was solid,” he said, adding, “The main point is the top line is good even if the bottom line is affected.”

Fung attributed the decline in profits to the general slowdown in consumer demand as well as to three one-time expenses incurred by the company in 2008: the development of the on-shore business in Europe; restructuring costs, particularly in the U.S., and customers that declared bankruptcy.

“We don’t expect to repeat these in 2009,” said Fung. “The group’s financial strength is highly resilient despite uncertainty in the external financial market.”


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