LITTLE ROCK — Li & Fung Ltd. of Hong Kong and its wholly owned subsidiary, Direct Sourcing Group Pte Ltd., says it has entered into a new agreement with Wal-Mart Stores Inc. of Bentonville.
As part of the agreement, an option for Wal-Mart to purchase all shares of Direct Sourcing Group - often called DSG - was terminated.
“DSG and Wal-Mart maintain a good relationship and expect to continue to work towards lowering the cost of merchandise by establishing direct relationships with suppliers,” Kevin Gardner, a Wal-Mart spokesman, said Monday in an e-mailed statement to the Arkansas Democrat-Gazette.He said the company would not comment further.
Li & Fung, the world’s largest supplier of clothes and toys to retailers, said in its statement that under the new agency agreement and related agreements, DSG will continue as a primary direct resource for Sam’s Club in the United States and will continue to provide buying agency services for the Wal-Mart U.S. division and for some international markets.
The agreement is for five years, with an option to extend it for an additional two years if both parties agree.
DSG has been supplying Wal-Mart with at least $2 billion worth of goods a year, Li & Fung Chief Executive Officer Bruce Rockowitz said last week.
“The size of the business and profitability of the business is growing, and better now than ever,” he said. The subsidiary broke even in the first half, will make a profit in the second half and be “very profitable” in 2013, he said.
Direct Sourcing Group was set up two years ago when the outsourcer’s relationship with Wal-Mart was new, Rockowitz said.
“They thought they needed a call option - just in case it doesn't go well, they can buy it back,” Rockowitz said. “They were comfortable after the first year that they didn’t need it anymore.”
Li & Fung shares have dropped 16 percent this year in Hong Kong trading, compared with a 12 percent climb for the benchmark Hang Seng Index. The stock last year slumped 37 percent after more than tripling in the decade through 2010.
In an investor conference Monday, Rockowitz said the supply unit to Wal-Mart doesn’t need fresh investment.
“We can actually leverage a lot of existing set-ups within Li & Fung,” he said. “The heavy lifting and investments have been done.”
The new agreement allows for Li & Fung to provide higher-margin design and replenishment services to the world's largest retailer, Rockowitz said.
First-half core operating profit fell 22 percent to $221 million as U.S. consumers curbed spending amid a slower economy, the Hong Kong company reported in August.
Information for this article was provided by Stephanie Wong and Frank Longid of Bloomberg News and by Steve Painter of the Arkansas Democrat-Gazette.
Business, Pages 21 on 09/25/2012