Heiress Apparent

When Kelly Gray took over as president of St. John Knits, nervous investors threw their own little welcoming party: They slashed the stock’s value by $40 million.

“Wall Street was saying: ‘Oh, my God, she’s just 29 years old. What could [the Grays] be thinking?’ ” said Marie Gray, St. John’s chief designer and co-founder (along with husband Robert) and Kelly’s mother.

The stock has recovered since last spring’s rude greeting, hitting a yearly high last month. But there’s still a bit of a buzz encircling the Grays’ heiress apparent.

It’s not just that she’s the founders’ daughter. There’s the rock musician husband, the ’55 baby-blue Thunderbird and, according to associates, the occasional flash of temper.

Then there’s the thing that really separates her from other company presidents: the fashionable good looks that qualify her to serve as the Irvine-based company’s model.

Her lack of management experience has some observers questioning whether Gray can lead a $160-million company that makes upscale knitwear and is the undisputed leader in dressy clothing costing less than $1,000.

“A lot of people pick on Kelly as a matter of principle,” said one businessman who knows the Gray family. “She’s young, beautiful, makes a lot of money and owns a huge chunk of St. John stock. To many people, she’s going to come across as a pompous little snot.”

Moving into the executive suite in a company founded by your parents is like moving into a fishbowl. That’s particularly true in the highly visible apparel industry, where a weak quarter or an uninspired spring line can spark immediate grumbling--or a painful stock drop--from shareholders.

People are going to say that “if she wasn’t a family member, she wouldn’t have gotten the job,” said Randel Carlock, professor at the University of St. Thomas in Minneapolis. “But the real measure of success should be whether, 10 or 15 years down the line, under her leadership, if this company is still growing and successful.”

Statistics underscore the fact that many second-generation managers simply aren’t destined to pick up where mom and dad left off. Family-business experts also note that parents rarely turn control of the business over to a daughter.

And, in Gray’s case, the challenge is complicated by the paucity of female role models in the executive suites of publicly traded companies.

“People tend to be more skeptical when they see this supposedly perfect package,” said a female executive who’s known Kelly Gray for several years. “It infuriates me that people will look at this woman and say she only got the job because of her father.”

Marie Gray, 60, acknowledged that the April 23 stock drop reignited maternal concerns “about the difficulties and the scope of the job. I want Kelly to be happy and have a normal life. Sometimes I wonder if the job isn’t going to be too hard or take up too much time.”

That said, there’s no question in this mother’s mind that her daughter is the best woman--make that person--for the job, an opinion heartily seconded by company Chairman Robert Gray, who’s already hinted that he’ll hand Kelly his chief executive’s title in 1998.

“You have to want to take a business on and lead it to the next level,” said Robert Gray, 71, who will stay on as chairman until at least 2000. “Kelly has that desire. She has the same goals that I do.”

Kelly, who recently celebrated her 30th birthday with a ‘60s-themed party at the Balboa Bay Club in Newport Beach, gamely says Wall Street’s initial vote of no confidence hasn’t dampened her desire for the job she’s dreamed about since she was 12 years old.

“I know I’m fairly young, and my education in this industry hasn’t been textbook,” Kelly said. “But my only desire is to make this company better, through controlled growth, without endangering profitability.”

Robert Gray is in the process of handing his daughter the keys to a well-oiled design, production and marketing machine for clothing worn by women both in business and polite society.

“St. John has fulfilled the wishes and dreams of middle-aged women who like to own Chanel knits but who can’t afford them,” said New York-based fashion newsletter Editor Alan Millstein. “These are women who are more likely to look like Barbara Bush than Sharon Stone, but the company isn’t interested in phlegmatic fashion.”

First Lady Hillary Rodham Clinton is known to have St. John outfits in her wardrobe; they are considered de rigueur among Capitol Hill women who want stylish yet politically correct clothing.

And a recent emigre to Orange County from New York reports that she “bought my token St. John outfit right away after learning that it’s practically the uniform of choice” in one stratum of Orange County society.

Part of St. John’s allure is a proprietary blend of Australian wool and rayon that the company’s 2,500 employees spin in its Southern California production plants. High-tech machines incorporate a twist into the fabric that serves as a sort of low-tech “memory”--giving happy customers clothing that rarely wrinkles.

St. John’s apparel and accessories have always borne the unmistakable stamp of Marie Gray, whose maiden name is St. John. She stumbled into a career as a women’s apparel designer while working as a Vanna White predecessor on the “Queen for a Day” television show.

Intent on stretching her limited wardrobe budget, she bought a knitting loom and began fashioning dresses that borrowed noticeably from the classic Chanel look. In 1962, Robert Gray, then a women’s apparel salesman and Marie’s fiance, agreed to pitch her dress designs to department store buyers.

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When the first day’s sales calls generated 84 orders, the stunned couple rushed to buy additional looms--and then pressed both of their mothers into service in a San Fernando Valley garage to finish the garments. Sales grew steadily, from $92,000 in their first year of business to $1 million in 1969.

The company continued to grow slowly through the years, moving to Irvine in the 1970s. A medical condition prompted Robert to sell an 80% stake in the company to Escada, the German apparel company, in the fall of 1989 for $45 million.

Escada ran into cash flow problems during the 1990s and sold the company to the public in a $117-million deal. The Grays and their managers retained about 20% of the company’s shares, and Robert postponed his planned retirement when his health improved.

Robert, who’s described himself as a salesman, says his company isn’t really in the business of creating fashions; that challenge, he says, is well-served by the likes of Calvin Klein and Armani. He’s more comfortable with words such as “reliable” and “appropriate,” and uses the phrase “investment apparel” to reflect his belief that a St. John garment, like precious metals, has long-term value.

“They’re in the business of general good-taste clothing,” said Millstein, the newsletter editor. “And while they’ll never win an award from the Council of Fashion Designers of America, they’ve made the designs of Chanel and designer Karl Lagerfeld affordable.”

When St. John Knits does make news, it’s more likely to be in the business section than in the pages of leading New York-based fashion magazines. That’s because, even though Kelly Gray applauds her design staff as “perhaps the industry’s most underrated,” her company has a history of designing clothes “with the customer in mind, not, if you’ll excuse me, for the fashion press.”

Inside St. John’s nondescript corporate buildings in Irvine’s industrial-park sector, most women on the headquarters staff wear the company’s easily identifiable knitwear.

Then there’s Kelly, the professed “black sheep” of the Gray family, whose stylish fashion tastes tend toward woven apparel along the Armani line.

When she married British-born musician Michael Blue on April 17, 1993, the bride with a penchant for stylish two-piece suits wore a traditional gown. But Our Lady Queen of Angels Church in Corona del Mar had its share of St. John designs--including the two-piece peach-colored suits worn by Gray’s six bridesmaids.

During a recent interview in her cluttered Irvine office, Gray wore a man’s white shirt from the Gap and a one-of-a-kind two-piece suit designed by Griffith & Gray, a new line created by Gray and longtime St. John designer Diane Griffith.

The apparel is in keeping with St. John’s fashion credo: Give women something they’ll feel comfortable wearing, not something that’s designed to woo the flighty fashion media.

Sitting behind the president’s desk and sipping from a St. John coffee mug, Gray says she’s exactly where she wanted to be when, as a 12-year-old, she entered the family business as a replacement secretary for her father.

That job ended on a sour note: “I was fired by noon,” she said, laughing. “I was not very good.”

She broke away from the family business for a few years and attended Stephens College in Missouri for less than a semester. The 5-foot, 8-inch Gray then found lucrative but boring work as a catalogue model in Chicago.

But she quickly opted to return to Southern California, where she resumed modeling for St. John Knits. “I didn’t feel comfortable in other people’s clothes,” she said.

Though perhaps best known for her modeling work, she has been active in the company’s product design, advertising and merchandising for nearly a dozen years. For the last six, she’s been a vice president and creative director.

She’s used her influence, analysts say, to help refocus the company on fashions that are more likely to appeal to younger customers. Analysts note that Gray is closer in age to the company’s core fortysomething customers than are her parents.

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Gray, who said she was thoroughly schooled in the St. John “look” by her parents during countless dinners at home, acknowledged the fine balancing act the company must perform as it pays homage to classic designs while incorporating a fresher look for younger, more daring consumers.

She’s well aware that outsiders are interested in her plans for carrying on the family business. That’s why Chapman University invited her to speak this week on the subject of “Carrying on an Entrepreneurial Tradition.”

What will she have to say? “I know exactly what I want to say,” Gray said. “But I probably won’t write the speech until that morning--otherwise it’s going to sound too rehearsed.”

Oh, and on the subject of the modeling thing: Gray politely dismisses questions about whether it’s an efficient use of her time to dash off to the photo studio twice a year for fashion shoots.

“It’s really the best way to do it,” she said. “I know the exact look that I want, and so does the photographer. So it really saves a lot of time.”

When it comes to management techniques, Gray and her father have distinctly different styles.

He’s a self-described quarterback who calls all the plays and remains deeply involved in day-to-day decisions. “I’m running this company,” he says with a laugh.

Kelly Gray is quite capable of making her opinions known, but, unlike her father, she preaches a team approach to managing.

“No one person can run this company,” she said. “It’s a collection of people who make it work.”

Analysts say St. John’s challenge is to keep its classic look while identifying and filling the fashion needs of younger women.

Any failure to remain modern, observers say, could result in the apparel industry equivalent of General Motors executives’ struggling to convince younger consumers that “this isn’t your father’s Oldsmobile.”

In recent years, St. John has broadened its appeal by expanding its line to incorporate fake furs, shoes, upscale sweatsuits, leather bomber jackets and an ever-widening array of accessories, including belts and fragrances.

The company also has high hopes for the Griffith & Gray line that made its debut in late 1994. Unlike the company’s traditional knits, Griffith & Gray features woven materials.

The new line represents a tiny fraction of overall sales, but Griffith & Gray is designed particularly for younger customers, whom St. John must court with “a more fashion-forward” look, said Jennifer Black Groves, a loyal St. John customer and executive vice president of Black & Co., a Portland, Ore.-based investment firm that’s issued a “buy” recommendation for the apparel company’s stock.

Gray said customers--not the insatiable fashion media--will remain the arbiters of St. John designs.

“We don’t do unrealistic designs,” she said. “We are bolder than we were 15 years ago, but we won’t stop designing for the customer.

“We’re not looking to reinvent the wheel each fashion season, but we do want to make the wheel bigger.”

It’s never easy for a founder to turn over the reins to the next generation. But experts agree that the second generation’s ability to succeed is determined in large part by the founder’s ability to relinquish power.

“The person turning over the reins really has to turn over the reins,” said Dave Harman, director of the Family Business Council at Cal State Fullerton’s School of Business Administration and Economics. “That means not coming to the office on a regular basis, which is a hard thing to do if you’re still chairman.”

The succession issue has surfaced once before at St. John Knits. In 1991, Michael Gray, Robert’s son from a previous marriage, resigned as president after working at the company for a dozen years.

As happens in many family businesses, his departure was driven in large part by generational tensions: “We had a lot of trouble working together,” his father acknowledged.

Kelly and Robert Gray say there’s no such tension in their relationship.

Robert Gray says he’s at ease with the thought of his daughter adding the CEO title.

“Kelly is already better at certain aspects of the day-to-day job than I am. I’ll be ready to walk away from the business when it’s time. Kelly is focused.”

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Profile: Kelly A. Gray Age: 30 Title: President Other work: Co-creator of Griffith and Gray division; also firm’s signature model since 1983 Previous position: Senior vice president and creative director Personal: Daughter of founders Robert and Marie St. John Gray Salary: $482,386 in 1995

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Company Profile Gray is president of a company with a 35-year history that has steadily increased its sales and earnings during the last five years. A glance at St. John Knits: Incorporated: 1962 Headquarters: Irvine Chairman and CEO: Robert E. Gray Vice chairman and chief designer: Marie St. John Gray Business: Designs, manufactures and markets women’s clothing and accessories under “St. John” and “Griffith and Gray” trade names Went public: 1993 Stores: 17 retail boutiques; also sold at Neiman Marcus, Nordstrom and Saks Fifth Avenue Exchange: “SJK” on New York Stock Exchange Employees: 2,510

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Economic Performance Between 1991 and 1995, St. John Knits more than doubled sales and nearly quadrupled profits. Sales and net income, in millions: *--*

Year Sales Net Income 1991 $65.9 $5.3 1992 80.2 8.3 1993 100.3 11.1 1994 128.0 14.9 1995 161.8 19.6

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Stock Story On April 23, St. John Knits stock dropped 7.5% after the announcement that Kelly Gray had been named president. It has since recovered and is trading from $47 to $51, adjusted for a May two-for-one split. Adjusted monthly closing prices and Friday close: *--*

Jan. $23.06 Feb. 29.06 March 33.05 April 29.69 May 29.69 June 44.63 July 39.88 Aug. 39.88 Sept. 50.13 Oct. 45.75

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Sources: St. John Knits, Bloomberg Business News, Times reports; Researched by JANICE L. JONES / Los Angeles Times