HONG KONG — Li & Fung, the Hong Kong-based sourcing company that’s seen as a bellwether for the U.S. retail sector, said Thursday that its full-year net profit fell 12 percent amid weak consumer spending as well as increased operating costs on key investments in the company.
The company, which sources goods for retailing giants such as Target and Wal-Mart, posted net income of $539 million, down from $612 million a year ago. Revenue rose 1.4 percent to $19.29 billion from $19.03 billion in 2013.
Chief executive Spencer Fung said at a press conference in the company’s office in Kowloon that “2014 was a year of transition and investment.”
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Fung assumed the post in July after the company’s licensing division was spun off into a separate, publicly listed group called Global Brands Group. The net income and revenue figures are excluding Global Brands.
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“Post spin-off, we’re much more asset-light, less volatile and more cash generative,” Fung said. “Without GBG our working capital requirement is less, our cap-ex is lower, we’re paying off the old acquisitions without making a lot of new acquisitions. So as a result we’re going to generate more and more cash in the future,” he continued.
As part of the spin-off, Li & Fung reorganized into two businesses, trading and logistics. The trading business focuses on providing sourcing solutions while logistics manages in-country logistics and global freight management.
Fung said 2014 was a challenging year from a macro perspective with many retailers discounting heavily. Despite this, total revenue increased slightly, driven primarily by the Asian business, which increased by 14 percent. The U.S. business was stable while Europe, which represents 18 percent of Li & Fung’s revenue, declined.
Li & Fung’s operating cost increased by 5 percent mostly due to an investment in the logistics business.
Looking ahead, Fung said the U.S. economy — which makes up 60 percent of Li & Fung’s business — should improve given the strengthening labor market and increased consumer spending, boosted by falling oil prices.
“We have no plans for any mergers and acquisitions at the moment. In the last three-year plan we did 30 acquisitions. This three year plan there will be a lot less,” Fung said.
William Fung, Li & Fung’s chairman, chimed in. “But having said that, in specific areas — logistics, for example — or in some product areas we are certainly not discounting some activity. But it should be much less than before,” he said.
The company unveiled a three-year plan last year which emphasized organic growth and investments in its operating platform and infrastructure. As part of the plan, the company’s trading network would aim to achieve a core operating profit that exceeds the entire firm’s core operating profit. The group also set out a target of doubling the core operating profit of its logistics business.
Speaking to reporters Thursday, William Fung said he thought the targets were a bit overly ambitious.
“I’m not so much pessimistic about reaching the targets as I am not very optimistic about reaching some of the targets that old management [established],” William Fung said. “To the extent that the circumstances and the environment don’t allow us to [get on the path to those targets] in the first year, I really don’t think it’s realistic. However, our pipeline is strong and our fundamental business is very much there. We’re making good progress but not necessarily to reach those targets.”
Li & Fung’s shares were relatively flat on the Hong Kong Stock Exchange after the announcement at 8.03 Hong Kong dollars, or $1.04 at current exchange.