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(Reuters) - Wal-Mart Stores Inc (WMT.N), the world's largest retailer, said it has decided to bring in-house some of the product sourcing that has been handled by Direct Sourcing Group (DSG), a unit of Hong Kong's Li & Fung Ltd (0494.HK).
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 (COST.O).
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 KATE.N, 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