Li & Fung Ltd. said its unit supplying Wal-Mart Stores Inc. will be profitable this year and that the retailer ended an option to buy the subsidiary because it had become “comfortable” with the relationship.
Li & Fung’s business with Bentonville, Arkansas-based Wal-Mart is “better than ever,” said Bruce Rockowitz, chief executive officer of Li & Fung, the world’s largest supplier of clothes and toys to retailers. The supplier dropped 2.6 percent in Hong Kong trading Sept. 21 after announcing the day before that Wal-Mart canceled an option to buy its Direct Sourcing Group Pte. unit. Li & Fung fell 1 percent to HK$12.08 in Hong Kong today.
The subsidiary has been supplying Wal-Mart with at least $2 billion of goods annually, Rockowitz said in a Sept. 21 telephone interview. “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 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.”
“We have a good relationship and there are still opportunities for business,” Scott Price, head of Wal-Mart’s Asia operations, said in a Sept. 21 interview.
Rockowitz said a Wall Street Journal report that said Wal-Mart canceled “much of a deal” for Li & Fung to supply its international stores and will move to buy more goods directly from factories was “not true.” The newspaper cited people close to the company it didn’t identify.
Chad Tendler, a spokesman with Dow Jones & Co. in Asia, the owner of the Wall Street Journal, said the company “stands by our original reporting and the accuracy of the information provided to us by sources.”
Li & Fung has 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 today, 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 in the interview.
“This is positive not only for revenue streams but also for margins as distribution is traditionally a higher-margin business,” Vineet Sharma, an analyst at Barclays Plc in Hong Kong, said in a note to clients dated Sept. 20.
Li & Fung said it will continue to be a primary supplier for Sam’s Club in the U.S. through Direct Sourcing Group and will provide buying-agency services to Wal-Mart’s U.S. operations and in some of its international markets. The accord is for five years with an option for a two-year extension and beyond, with no break-out clause, 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.