Li & Fung committed to growth through acquisitions
Li & Fung, the world's largest supplier of apparel and consumer goods, has stressed that growth through strategic acquisitions and the trend for outsourcing by retailers and brands will continue to drive its business going forward - despite posting a 22% drop in core first-half operating profit.
"Li & Fung's growth strategy will continue to have a dual focus: both organic growth and strategic acquisitions," William Fung, chairman of the Hong Kong based group confirmed yesterday (9 August).
"This has proven to be a very effective business model for Li & Fung over the years," he noted, adding: "There is no doubt that more acquisition deals are available at attractive prices in a time of global economic uncertainty."
Continued economic fragility in its main markets, including its US distribution business, saw core operating profit fall to US$221m in the first six months of the year, although turnover edged up 4% to $9.128bn. Shares fell 19.3% to HKD12.9 in trading today (10 August) as analysts digested the news.
The company, whose customers include retailers and brands like Wal-Mart, Target, Kohl's and Marks & Spencer, posted a 33% jump in net profit to $312m during the half, but this was lifted by a gain of $198m on two previous acquisitions.
So far in 2012 the firm has snapped up Hong Kong based apparel firm Hang Ten, which operates 790 stores across Asia, while its private equity arm Trinity Ltd is the new owner of upmarket UK men's wear brand Gieves & Hawkes.
Reiterating William Fung's comments, group president and CEO Bruce Rockowitz told analysts: "On the acquisitions side we believe there is a lot of opportunity, and we also believe [that] in a very difficult market we will do more acquisitions as there's less organic growth."
"We don't see any change in the trend for outsourcing; it's continuing unabated, especially when the world has many macro uncertainties," he added.
"And of course people are now focusing on what they do well; retailers are focusing on product [and] marketing, and we see no change in that."
The time, cost and risk involved for retailers in setting up a worldwide sourcing network means many customers choose instead to outsource - with a new deal just inked with Target Australia confirming that new opportunities continue to arise.
Rockowitz described the deal as "an example of how Li & Fung can apply its global sourcing and supply chain capabilities to reduce product cost and increase efficiencies."
But he also noted that it is equally typical for companies to strike a balance between having their own sourcing setup as well as using Li & Fung, which can tap in to some 15,000 factories across its supply chain.
"Rarely do you have 100% of their business, and I don't see any change in that," he explained.
Emphasising the point that the dynamics of outsourcing have changed little over the past seven years, Rockowitz shared data to demonstrate movement within Li & Fung's top 100 customers.
"We get a lot of new customers, but not many move into the top 100 and we don't lose many either," he said.
During the period from 2005 to 2007, the firm added 20 new customers and 13 moved into the top 100. In 2011, it added five new ones and eight moved into the top 100. Likewise, turnover from new customers was $803m in 2005-07, rising to $1.656bn in 2008-2010, but falling to $410m last year.
"When you look at the top 100 customers, last year they accounted for $15.04bn of our business, up from $10.14bn in 2005-07 and $13.34bn in 2008-10," Rockowitz said. But as a percentage of total turnover, the top 100 accounted for 75% in 2011, down from 86% in 2005-07.
"This really shows the business itself hasn't changed at all. The market is very difficult and we are in a period of protracted negative market; first the US in 2008-10 and now we're dealing with Europe, which is a smaller market for the company."
He also explained that the company's annual top line organic growth has averaged about 10%, although this obviously fluctuates. In recent years, for example, it was 11% in 2008, fell to -13% in 2009, and has levelled at 5% and 4% in 2010 and 2011 respectively.
"2008 to 2011 are probably the worst four years in history for business generally, so it's no wonder we've done a lot of acquisitions in that time. But when the market turns around our market share will be that much bigger. We're not losing customers, but a lot of them are themselves having issues and contracting.
Dual growth strategy
"We're really set up for a dual growth strategy and nothing has changed from that point of view. We see many opportunities in the 'Ecosystem' acquisition model, the acquisition pipeline is strong, and I think you'll continue to see more deals in the rest of this year and into next year - especially the first half of next year."
Looking ahead, this strategy is especially pertinent given the weak macro-environment in Europe, which is unlikely to improve "over this three-year plan and perhaps beyond. The only way we feel we're going to grow in Europe is through acquisitions."
But over in the US, Rockowitz believes improvements are expected after the election later this year. And he notes that "exciting developments" are planned for the LF Asia platform in 2013 where "we're talking about $1bn in the fashion and home area by next year."
Cost headwinds have also abated and, "although it has come slower than we wanted and expected it to," will lead to "a major improvement in margins" from the second half of this year.
Having set itself the target of achieving an "ambitious" $1.5bn in core operating profit by 2013 under its current three-year plan, the company remains optimistic it will meet its target - even though the economic environment has worsened since the goals were set two years ago.
"We remain committed to our targets," Rockowitz, adding: "We are adjusting and are seeing a very big effort on the company to hit those targets. We may not hit it; but I can say pretty confidently we will grow dramatically next year."
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