Shares of Wal-Mart Stores Inc.WMT declined in mid-afternoon trade on Friday as the Bentonville, AR-based retailer announced that it would stop selling Welspun India Ltd.'s Egyptian-cotton sheets over the controversy related to improper labelling of products, per Bloomberg. Shares of Welspun India Ltd., one of its bedsheet suppliers, slid as much as 5% in Mumbai trading.
Wal-Mart, Welspun's third-biggest customer, took the step after reviewing cotton certification records of Welspun India. Welspun was unable to guarantee that the products are 100% Egyptian cotton.
Egyptian cotton has a longer fiber that creates a softer thread compared to other cotton. It often carries a higher price because shoppers consider it to be of better quality.
Wal-Mart, however, will not completely cut ties with Welspun. It will work with the Indian vendor to implement stringent controls and better labeling of products. The retailer will also offer a refund to customers who have purchased these sheets. Wal-Mart used to sell the Welspun sheets and pillow cases under the names, Better Homes & Gardens and Canopy.
WAL-MART STORES Price and Consensus
Evidently, Wal-Mart is following the footsteps of its peer, Target Corp. TGT , which pulled its Welspun products from the shelves on Aug 19, following the discovery that they were mislabeled. Target terminated all business with the Indian supplier, after its extensive investigation confirmed that Welspun had been selling cheaper sheets and pillowcases as premium Egyptian cotton.
Welspun makes towels, sheets, rugs and carpets for 18 of the top 30 global retailers. It manufactures one out of every five towels sold in the U.S., and sells to major customers like J.C. Penney JCP and Macy's, Inc. M .
Welspun has involved a Big Four firm to audit its supply processes. Welspun is also putting stronger quality controls in place and adopting new labeling practices. However, the Indian company fears the loss of other customers after Target and Wal-Mart's withdrawal.
Wal-Mart currently carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
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