Wal-Mart taking back some Li & Fung sourcing

Wal-Mart Stores Inc., the world's biggest retailer, pulled some goods-sourcing business from Li & Fung Ltd., raising concerns that the Hong Kong company may see other customers follow suit.

"We have made a decision to transfer certain sourcing functions for Wal-Mart in-house," Wal-Mart said in an emailed statement. Li & Fung's Direct Sourcing Group Pte. will continue to supply Sam's Club goods, the retailer said.

Li & Fung set up Direct Sourcing Group in 2010 to supply Bentonville-based Wal-Mart, which allowed the Hong Kong-based company to act as a buying agent for $2 billion of goods in the first year. Profit for Li & Fung, which provides retailers with sourcing and distribution through 15,000 suppliers, fell last year as customers relied on promotions to fend off online competitors.

In 2012, Li & Fung announced a new arrangement with Wal-Mart, which allowed the U.S. retailer to terminate the option to purchase all of the shares of Direct Sourcing Group on or after Jan. 1, 2016.

"We suspect DSG has never become profitable" based on the 2012 Wal-Mart decision, Spencer Leung, an analyst at UBS AG, wrote in a report Friday. "Hence, we anticipate limited financial impact on L&F, though Wal-Mart's decision will most likely trigger other major retailers to review their sourcing arrangements with L&F."

Management previously said turnover from Direct Sourcing Group was around $1.7 billion to $1.8 billion in 2011, and it was loss-making that year, Leung wrote. He maintained a sell rating on the stock.

Li & Fung didn't respond to questions on the Wal-Mart statement. The stock fell 2.3 percent by the close of trading in Hong Kong, the biggest decline since May 6. The benchmark Hang Seng Index gained 1.7 percent.

Kate Spade & Co. recently also amended its agreement with Li & Fung, reducing its fees and bringing all sourcing functions for accessories in-house starting spring 2016, President George Carrara said during a conference call this month. Ready-to-wear products will retain the full services of Li & Fung, he said.

Leung estimated Li & Fung generated about $300 million in annual sales from the U.S. luxury brand in the past, making it one of its leading customers. Kate Spade previously said one sourcing agent managed about 70 percent of inventory purchased for 2014, according to Leung.

"With an increasing number of major accounts of L&F reducing their reliance on L&F, we are concerned about long-term sustainability of L&F's core business," Leung wrote Friday.

Chief Executive Officer Spencer Fung declined to comment on individual customers at a news conference Thursday. He said the number of its biggest customers has increased.

Li & Fung's profit fell 18 percent last year as stores had to lower prices more than expected in the third and fourth quarters, Fung said in March. Improvements in the U.S. and European economies, which combined account for more than 80 percent of the company's revenue, weren't strong enough to boost profit, the company said then.

Business on 05/23/2015

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