Li & Fung profits jumped a quarter last year

Li & Fung profits jumped a quarter last year

Given the circumstances surrounding global sourcing giant Li & Fung’s announcement of its new three-year plan, you could forgive analysts for being ever so slightly sceptical about the company’s ability to more than double its core operating profit by 2013.

The reception given to the Hong Kong-based business’s 27% rise in full-year profits for 2010 was somewhat muted, despite a strong contribution from the company’s European and US onshore operations – a key factor for future growth, as we shall see.

What is more, a glance at Li & Fung’s last three-year plan doesn’t exactly encourage optimism. Annual sales were billed to reach US$20bn by 2010, but fell short by $1bn, while core operating profit hit $725m, well shy of the target of $1bn.

The obvious caveat to reading too much into this apparent under-achievement is that the plan coincided with a pretty tough three years for the global economy; and even fast-growing companies like Li & Fung cannot be altogether immune to their impact.

The new plan, which envisages core operating profit more than doubling from $725m to $1.5bn by 2013, marks a “new era”, according to group managing director William Fung – and he’s not just talking about Li & Fung’s restructuring into three distinct business units.

The plan also recognises the context of rising prices permeating the supply chain, a scenario which makes Li & Fung’s philosophy of being almost omnipresent throughout that supply chain all the more important.

These rising prices, the company maintains, will continue “into the foreseeable future”, with their ramifications only just beginning to be felt.

The breakdown of the new core operating profits is as follows: trading to move up from $432m to $700m; logistics to increase from a token loss of $5m to a $100m profit; and, most crucially, onshore profits to soar from $298m to $700m.

Expanding the logistics contribution, which company president Bruce Rockowitz acknowledges will come partly from acquisitions, is also a result of the sheer size and geographical scale of Li & Fung’s operations; when you work at every stage of the supply chain, joining the dots and being logistically independent makes perfect sense.

Onshore businesses – Li & Fung provides services such as importing, design, etc for retail clients such as Target and Kohl’s – are another important and growing part of the business, particularly as it is more profitable than the core trading activity.

But, given that major acquisitions and smaller roll-up deals added some $3.7bn in annual turnover during 2010, acquisitions will remain arguably the most important strand of the Li & Fung strategy through to the end of 2013.

Rockowitz admitted as much, adding: “While the three-year plan targets are once again ambitious, we are confident about us achieving them because the group now covers the entire supply chain end-to-end, and is well-positioned to grow across these three distinct yet interconnected networks.”

That Li & Fung has a reported $1bn in its warchest to fund future acquisitions will do no harm to this ambitious strategy and, whatever the questions over past performance, should win over one or two sceptical analysts to the likely success of its future plans.