JCP J C Penney Company Inc

By Sarah Nassauer and Preetika Rana 

Wal-Mart Stores Inc. said it would stop selling Egyptian cotton sheets made by Welspun India Ltd., after its investigation found the Indian textile giant couldn't guarantee the products were legitimate.

"Welspun has not been able to assure us the products are 100% Egyptian cotton, which is unacceptable," Wal-Mart spokeswoman Marilee McInnis said.

The world's biggest retailer is removing the Welspun products from U.S. store shelves and Walmart.com. Wal-Mart said it would offer customers who purchased the products a full refund. It will donate the sheets currently on shelves.

The move is the latest blow to the Indian textile company after Target Corp. last month said it was pulling thousands of Welspun's "Egyptian cotton" sheets from its shelves and cutting ties with the company after it found Welspun had not used actual Egyptian cotton in the products for about two years.

Target's move spurred other Welspun customers, including Wal-Mart, J.C. Penney Co. and Bed Bath & Beyond Inc. also to investigate the products.

Penney and Bed Bath & Beyond on Friday didn't immediately respond to requests for comment.

A spokesman for Welspun acknowledged the Wal-Mart action and said the company is working with retailers to resolve the issue. "We take the current traceability concerns around some of our product lines very seriously," he said.

Welspun has hired an accounting firm to investigate the cause of the problems and said it is installing technology to better monitor its supply chain. Welspun said around 6% of its total sales comes from the Egyptian cotton products.

The Wal-Mart spokeswoman said the big retailer isn't cutting ties with Welspun. Instead, it is working with the Indian company to "implement strong controls and better label the products they supply to us," Ms. McInnis said.

Two-thirds of Welspun's sales come from U.S. retailers. Since the Egyptian-cotton issue flared up last month, shares of Welspun have lost 45% of their value.

The investigations that the retailers have disclosed also have shined light on a longstanding issue in the cotton industry: there isn't enough Egyptian cotton produced to make all the products that claim to contain it.

Egypt produced less than 1% of the global cotton supply last year, according to the U.S. Department of Agriculture.

Cotton Egypt Association, which licenses the trademark and certifies suppliers, estimates 90% of products labeled "Egyptian cotton" are inauthentic. Egyptian cotton is associated with textiles that consumers consider soft and strong, but the marketing term doesn't denote a specific type of cotton, rather fibers grown in Egypt.

"Welspun has gone through our usual licensing process, including sample testing," said a spokesman for Cotton Egypt in an email at the end of August. The association is investigating the retailers' complaints, he said.

But the issue has been long-percolating. In 2008, a Wal-Mart employee warned headquarters staff that Welspun might have been selling the world's largest retailer fake Egyptian cotton bed sheets.

At the time, Wal-Mart launched an investigation, interviewing employees at its Arkansas headquarters and in India over several months, according to former employees and documents reviewed by The Wall Street Journal.

"Welspun was able to show us its supplies of Egyptian cotton were sufficient to meet all of Wal-Mart's orders," said Ms. McInnis, the spokeswoman for Wal-Mart. "At that time we were reassured."

Wal-Mart hadn't investigated the authenticity of Welspun's Egyptian cotton products again, until this summer, she added.

Write to Sarah Nassauer at sarah.nassauer@wsj.com and Preetika Rana at preetika.rana@wsj.com

(END) Dow Jones Newswires

September 09, 2016 16:25 ET (20:25 GMT)

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