Investors Slam Offer for Ailing St. John Knits
Wall Street analysts and big investors took aim at St. John Knits Inc. Chief Executive Robert E. Gray on Thursday, calling the $28-per-share, $490-million offer his family has made for the upscale women’s apparel maker “grossly inadequate” and “really ridiculous.”
Their comments came during a Thursday conference call intended to discuss the Irvine company’s fourth-quarter profits, which fell for the first time since St. John went public in 1993.
But many of the callers were more eager to discuss the buyout offer that Gray and his family made nine days earlier. And they were not happy.
“It seems to me you and your management team have made some serious mistakes and are asking our shareholders to pay for it,” said Jerome L. Dodson, manager of the Parnassus Fund, a $368-million stock mutual fund that specializes in buying undervalued companies.
He said the Grays’ offer raises some “ethical and legal problems” and has upset shareholders.
“I just want you to be put on notice,” Dodson said. “We’re not too happy about the situation.”
Gideon King, with Loeb Partners Corp. in New York, said the $28-a-share bid doesn’t reflect St. John’s asset value and “high-end niche.” “I hope that offer really isn’t a serious one,” he said.
Asked how he arrived at the price, Gray declined to be specific. “We picked the price and put it out there,” he said. “How we got to that price is something I’d rather not comment on.”
Thursday’s conference call was extraordinary in that such sessions between Wall Street and St. John executives often have been love fests, with analysts praising the Grays and sometimes gushing over their products.
Some callers Thursday seemed to want to cushion the blow, offering Gray words of encouragement and urging him to “manage through” St. John’s “life cycle problems.”
“Please, I encourage you not to take the easy out, Bob,” said Holly L. Guthrie, an analyst with Janney Montgomery Scott.
The analysts aren’t the first to complain about the offer or question its fairness. Two shareholder lawsuits were filed almost immediately after the Grays made their proposal Dec. 8.
One analyst Thursday asked what steps were being taken to ensure that St. John shareholders get a fair deal, given what he called the “highly insider nature” of the company’s board, which is composed mostly of family members and employees.
The board members include Marie St. John Gray, the firm’s head designer, and the Grays’ daughter, Kelly Gray, the company’s president.
Robert Gray said that all proposals will be considered by a three-person committee that was appointed last week to evaluate the buyout proposal.
“I’d be happy to hear if somebody came in and wanted to offer more money,” he said. “We feel we’ve offered a fair price for the company based on the current trend.”
So far, no other offers have surfaced, he said.
Several analysts suggested that St. John’s board remove its “poison pill” plan enacted last month, which is designed to prevent a hostile takeover. That would allow the market to determine the company’s fair price, they said.
Others suggested that St. John actively seek other offers. Asked if he would stay on if the company attracted a higher price, Gray declined to comment.
Also during the conference call, Chief Financial Officer Roger Ruppert outlined the company’s disappointing fourth-quarter results.
Fourth-quarter profits fell 35% to $7.13 million, or 42 cents a share, from $10.97 million, or 64 cents a share, in the same year-earlier period. It was the first quarterly earnings downturn on a year-over-year basis since St. John went public five years ago.
Sales for the period ended Nov. 1 rose 6%, to $75.6 million, from $71.5 million a year earlier.
For the year, St. John’s profits also fell for the first time ever, by 3%, to $33.4 million, or $1.94 a share, from $34.4 million, or $2.10 a share, in fiscal 1997. Sales rose 16%, to $281.9 million, from $242.1 million.
Gray said the company has tried to grow too quickly, which caused manufacturing inefficiencies that ultimately hurt profits.
“The effect of these problems is St. John experienced its worse fall season in history,” Gray said, adding that he is “extremely disappointed” by the results.
Company officials said the slippage is tied to the problems that arose earlier this year when the company tried to expand its customer base by producing more complicated “novelty” items, some of them intended to lure younger customers.
Gray has said repeatedly that St. John became too “fashion-forward” and should have paid more attention to the core knit products upon which the company’s reputation was built.
He said earlier this month that he wants to slow the company’s growth to focus on improving quality, “and Wall Street doesn’t like slow growth.”
Contributing to the company’s problems earlier this year was a sharp increase in overtime, which raised costs and resulted in imperfections in some garments, some of which were recalled.
While the company’s overtime costs are still high, they should start to fall after Christmas, Ruppert said. Already, the “quality is pretty much back up to the St. John levels,” he said.
But even that has come with a cost.
“We’ve probably gone overboard on inspecting now,” he said. “And that causes inefficiencies also.”
The company did offer some good news Thursday, saying retail sales picked up in November, continuing through last week.
St. John shares closed Thursday at $25.94 in New York Stock Exchange trading, down 13 cents.
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Earnings Reversal
St. John Knits saw its 1998 fourth-quarter earnings fall 35% from a year ago. Other quarterly earnings this year surpassed earnings in the comparable quarters last year. Earnings, in millions:
1st qtr.
1997: $7.38
1998: $9.22
2nd qtr.
1997: $8.87
1998: $9.75
3rd qtr.
1997: $7.20
1998: $7.33
4th qtr.
1997: $10.97
1998: $7.13
Source: Bloomberg News
