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When Levi Strauss & Co. was slapped this month with its first sell rating, Goldman Sachs largely blamed the weak U.S. wholesale market. But Levi’s top executive says that really comes down to one main laggard: Sears.

Although the jeansmaker reported earlier this month that its U.S. wholesale business was down 2% in the latest quarter, the business is healthier than it looks, said Levi Chief Executive Officer Chip Bergh. That key division would have been up 2% excluding sales to Sears Holdings and the off-price retailers Levi has been intentionally weaning off.

“The one area that really concerned investors was our U.S. wholesale business. Had we known the reaction that that was going to get, we would have done a much better job explaining what was going on,” Bergh said in an interview Tuesday at Bloomberg headquarters in New York.

The day after the Goldman downgrade, the stock sunk to its lowest level since its March IPO.

Sears used to be the San Francisco-based company’s largest wholesale customer a decade ago. Now, Bergh described the company as a “shadow of itself.”

Wholesale Reduction

Levi has been reducing its dependence on wholesale customers overall, including at discount retailers like TJ Maxx and Ross—where it can’t get the same margins as in full-price stores. It has also become less reliant on struggling brick-and-mortar department stores contending with falling foot traffic. About eight years ago, the U.S. wholesale business was 47% of the company’s overall business. At the end of fiscal year 2018, it contributed to just under a third worldwide, Bergh said.

“What we’ve been telling investors is expect U.S. wholesale to be choppy,” Bergh said. “There are customers that are challenged and struggling financially and still need to close stores. So it still is going to be bumpy.”

To guard against this, Levi has been diversifying where it sells its products. It has started to offer premium merchandise at Bloomingdale’s and Nordstrom, higher-priced retailers known more for their designer denim. Within the last year, it also launched six Macy’s in-store shops where customers can buy directly from the jeans company and get help from Levi associates. Under the deal, Levi gives Macy’s a percentage of the sales. That trial run could expand to 20 or 30 locations, Bergh said.

“It’s not hundreds of doors,” Bergh said. “But they’re bigger, more important doors where we can demonstrate that we can lift the business by having service there in the pad.”

Target Push

The Levi brand is also pushing into new big-box retailers like Target. While Levi was already selling its Denizen brand in stores, Target now offers Levi-branded men’s jeans at about 20 locations that sell for around $50, about double the average pair of Target jeans. The inventory, which also includes tops and jackets, could expand to 50 Target stores or more.

“At full potential it’s probably about 200 doors,” Bergh said, noting that Levi jeans do best at Targets in urban centers and college towns. “If you were to map the United States of where we’ve got distribution, many of these stores fill white spaces for us,” he said.

Outside of wholesale, Levi has also been expanding its own branded storefronts, adding about 100 company-operated stores globally this year, about two-thirds of which are outside the U.S. It has also been increasing sales through its own website. Although its digital site isn’t yet profitable, Bergh says he’s optimistic it will be by the end of next year.

Levi’s First Sell Rating Prompts CEO to Detail Plan for Dressing Up Its List of Retailers

Wholesale Reduction

Target Push

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