Spencer Fung

HONG KONGLi & Fung Limited reported profits of continuing operations in the year to Dec. 31 plunged 26.9 percent to $171 million from $234 million, with core operating profit decreasing 20 percent to $285 million, largely due to challenges in its Supply Chain Solutions (SCS) business and investment in digitalization.

Adjusted profit attributable to shareholders fell 15.9 percent, to $117 million from $139 million in 2017. Revenues declined 6.2 percent to $12.7 billion from $13.53 billion.

At a press conference here Thursday, group chief executive officer Spencer Fung said that, “2018 was a demanding year and we’ve made a fundamental reorganization of our business in line with our three-year plan to build the Supply Chain of the Future.” The company recently restructured the management team, naming Joseph Phi group president, Wilson Zhu chief operating officer, and bringing in Darren Palfrey as chief digital officer, a newly created position.

“We have the right strategy, and now the right structure and people in place,” said Fung. “With all three elements in place we have built the right foundation for the future. I am confident that we are on the right track.”

The SCS numbers are the result of speeding up the supply chain, a key priority for the company. Customers need less inventory as a percentage of sales, resulting in a multi-year destocking. One large customer, Kohl’s, has now gone through two years of destocking, Fung said. “All our customers are also doing the same thing, speeding up the supply chain and going through multi-year destocking, so this is putting quite a lot of pressure on the top line.”

He added that margins are up by 0.4 percent to 10.6 percent, and that costs have been reduced by more than $100 million in the last two years; costs in the SCS business alone have been reduced by 15 percent to 18 percent and he expects they will continue to fall.

Li & Fung is working to fully digitize the supply chain, planning to invest $150 million over the next three years in the effort, so the group started with the design and development phase, which Fung said has solved many problems. “When we first started getting into 3-D design, we were experimenting and doing pilots,” he said, and until about six months ago, the company was not charging for this service.

Now the company’s management is confident that this is a genuine service that can be monetized, and the company has been experimenting with it for the last few months. “It is now a different business model. We’re going to start generating revenue pretty quickly,” he said. “It’s only been 14 months, so we’re pretty excited.”

The planned initial public offering of the company’s profitable LF Logistics business is expected to unlock value and enhance the group’s capital structure, as Li & Fung will remain the controlling shareholder, and consolidate its results.

Consumer consumption remains strong, despite the rash of store closures in the U.S., which accounts for 70 percent of Li & Fung’s business. Fung declined to give specific profit projections for 2019, but he expects to see continued pressure on the top line, perhaps mid-single digit.

“But I think what you see in the second half of 2018 is that the decrease is actually smaller now, it’s decelerated. And you will see that decrease go lower and lower in 2019.”

The company claimed it has seen little impact from the ongoing U.S.-China trade war, contending that China currently accounts for only 51 percent of its sourcing, a number that is expected to drop to below 50 percent in the future. “Our production network spans over 50 countries, providing the best defense possible against fluctuations in trade policy and helping mitigate any negative impacts from tariff increases,” Li & Fung said. “While the current trade war has had minimal on our business, we are working closely with our current and prospective customers to formulate and implement contingency plans to migrate their China-centric procurement networks.”