UPDATE 1-Li & Fung H1 profit tumbles 70 pct but says worst is over

Tue Aug 13, 2013 5:25am EDT

* H1 net profit $96 mln vs consensus of $150 mln

* Stock has plunged 60 pct since record high hit in 2011

* Fourth-worst performing stock on index so far this year

By Donny Kwok

HONG KONG, Aug 13 (Reuters) - Global sourcing firm Li & Fung Ltd's first-half net profit tumbled nearly 70 percent to its lowest level in eight years on sluggish consumer sentiment in Europe and the United States, but it said it was on track to recover this year.

The consumer goods exporter, which supplies retailers such as Kohl's Corp and Wal-Mart Stores Inc with clothing, toys and other products, also said restructuring of its U.S. distribution unit was on track for completion by the end of 2013.

Li & Fung posted net profit of $96 million for January-June, below an average forecast of $150 million in profit from four analysts surveyed by Thomson Reuters.

While this was its weakest earnings for a six-month period since the first half of 2005 when it reported a profit of $79 million, the company and analysts noted that its business model had become heavily skewed towards second-half earnings.

"It's almost pointless looking at the first half numbers. Probably 90 percent of the distribution business occurs in the second half of the year, so all the sales you are seeing at the moment are pretty much from their trading business," said Nicholas Studholme-Wilson, an analyst at Sun Hung Kai Financial.

"It looks fine to me. To me this is about a margin improvement story."

Despite challenging macroeconomic conditions, Li & Fung said its core sourcing business remained solid and continued to gain market share.

"Following a disappointing year in 2012, we believe the worst is behind us, and we are on track to recovery in 2013," Chairman William Fung said in a statement.

The Hong-Kong based group switched its strategy three years ago to become less of a middleman and more of a brand-management business as major clients sourced more goods straight from manufacturers, and it embarked on a string on mostly minor acquisitions.

During the first half of 2013, the group made five acquisitions for approximately $432 million. It made 10 acquisitions alone in 2012.

But it has struggled to generate revenue from that strategy, resulting in the lowest return on assets since at least 2000, according to Thomson Reuters data.

The stock has plunged about 60 percent from an all-time high hit in 2011 and is the fourth worst-performing stock on the benchmark Hang Seng index this year.

Short-selling remains strong. According to Markit, it is the second-most heavily borrowed stock in the Hang Seng Index in terms of percentage of shares out on loan versus total outstanding shares.

The stock ended up 1.4 percent on Tuesday ahead of the results announcement.

Li & Fung said it was seeing an uncertain market environment in Europe and that while the United States was showing signs of a recovery, it remained cautious.

The results come ahead of U.S. retail sales figures later in the day and earnings from major U.S. supermarket and department store chains this week. Macy's Inc reports on Wednesday, while Wal-Mart, Kohl's and Nordstrom Inc report on Thursday.

FILED UNDER: