The move to buy more goods directly from factories comes as Wal-Mart, hampered by sluggish sales and profits, looks to squeeze costs out of its supply chain.
"We have made a business decision to transfer certain sourcing functions for Wal-Mart in-house, and as such will work collaboratively with DSG to ensure a smooth transition over the next several months," Wal-Mart said in a statement.
Wal-Mart said it would continue to use DSG for sourcing products for Sam's Club, a unit that sells products in bulk and competes with Costco Wholesale Corp
.Wal-Mart operates 648 Sam's Club stores, or about 12 percent of its network of 5,200 stores in the United States, its largest market. Globally the retailer runs about 11,500 stores.Wal-Mart announced its partnership with Li & Fung in 2010. It said at the time that Li & Fung would form a new company to manage the account, expecting it to act as a buying agent for $2 billion worth of goods in the first year.But in September 2012 Li & Fung signaled a shift in the relationship, announcing in a filing with the Hong Kong Stock Exchange that Wal-Mart had terminated its option to buy all shares of the DSG unit. Under an amended agreement, Li & Fung said at the time that it would continue to be the primary supplier for Sam's Club and buying agent for Wal-Mart in the United States and for certain categories in some international markets.Wal-Mart did not immediately respond to additional questions about its relationship with Li & Fung. Li & Fung declined to comment. News of Wal-Mart's move was first reported by The Wall Street Journal.Earlier this week Wal-Mart reported an 8.3 percent drop in operating income for the latest quarter, hurt by a stronger dollar and reflecting costs to raise wages and investments to grow its online business.The development marks the latest blow for Li & Fung, which posted an 18 percent drop in operating profit in 2014, citing a drop in margins and higher operating costs.Wal-Mart cutting back its business is unlikely to have much of a financial impact on Li & Fung, but "will most likely trigger other major retailers to review their sourcing arrangements (with Li & Fung)," UBS analyst Spencer Leung wrote in a research note on Friday.Another client, handbag maker Kate Spade & Co , which was estimated by UBS' Leung to have generated about $300 million in annual revenue for Li & Fung, said this month that it had amended its agreement with the company and would bring sourcing for accessories in-house. It said it would continue to rely on Li & Fung for clothing supply and quality inspections. (Reporting by Nathan Layne in CHICAGO; Additional reporting by Clare Baldwin in HONG KONG; Editing by Lisa Shumaker, Leslie Adler and Kenneth Maxwell)