St. John Gives 2nd-Quarter Warning
In a setback for St. John Knits Inc., which makes and sells some of the nation’s most expensive garments, executives on Friday said earnings will be disappointing for its fiscal second quarter because of quality-control problems.
Chief Executive Bob Gray said he discovered imperfections in the company’s knit apparel in February while inspecting clothing at South Coast Plaza in Costa Mesa. Inspectors were dispatched to take a closer look and discovered that about 5% of the items had defects such as crooked pockets and loose buttons, Gray said.
Sales representatives then discovered similar flaws at stores throughout the U.S., he said.
The Irvine company pulled the clothes off the rack and sent them back for repairs, which cost the company valuable production time.
“People that had been producing garments were now repairing garments,” said Gray. “St. John as a company has been built on fine quality garments, and we have no intention of sacrificing this quality.”
The upshot financially is that earnings for the quarter ended May 3 are expected to fall short of analysts’ estimates for the first time since the company went public in 1993. The company said it expects to earn 57 cents a share for the three months, short of the 61 cents that analysts had projected. The company earned 52 cents a share in the same period last year.
Gray emphasized, however, that St. John Knits is resolving the problems and expects to record a 20% growth in sales for the entire year.
Despite the reassurances, the company’s shares slumped Friday on the New York Stock Exchange. They fell 12%, or $5, to $38.44.
The news was a bit worrisome to Cynthia Graff, a Newport Beach resident who says St. John Knits garments make up about 90% of her wardrobe.
But Graff doesn’t intend to back off on her purchases since she considers the clothing classic and durable, such as the black knit skirt she bought seven years ago for about $250 and wore throughout her pregnancy by simply loosening the elastic.
As an example of how devoted some customers are to their knits, Patricia L. Murphy-Kessinger said her husband first grabbed her St. John Knits--which cost $700 to $1,000 per outfit--when they had to evacuate their home during the 1993 Laguna Beach firestorm.
“He thought that they had more value than the [financial and tax] records that I was pulling,” she said.
In a conference call with analysts Friday, Gray emphasized that the problem is only temporary.
“The main thing I want to get across today is this is not a trend,” Gray said. “I think if you go out to the stores today you will find the fall product . . . will be absolutely pristine.”
He said the company’s problems stem, in part, from its drive to maintain steady growth, as the demand for the product continues. Gray admits the company may have been pushing too hard, and assigning employees too many overtime hours to keep the numbers up.
To remedy the problem, Gray said the company plans to hire more employees and cut back on overtime. The company also has adjusted inspection procedures.
Gray said the company, which currently has 3,500 employees, plans to hire hundreds of people over the next year to handle inspections and other duties.
“We’re going to create a large enough work force so that we will not have to work overtime,” he said. “It’s a problem I know we can correct completely.”
Analyst Holly Guthrie agreed that the company’s problems are tied to its growth.
St. John Knits is the only design house in the United States that handles the product from start to finish, Guthrie said. The company buys the wool, spins the yarn and carries the product through to its completion, even manufacturing the buttons and bows, she said.
Last year, the company had to overcome a production glitch related to a shortage of knitting machines for a strong-selling product, she said.
St. John Knits has 16 retail stores throughout the nation and sells in high-end specialty stores, including Nordstrom, Neiman Marcus and Saks Fifth Avenue.
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Share Price Snag
St. John Knits’ stock slumped Friday after the maker of women’s clothing and accessories projected that second-quarter earnings will be below expectations. Executives blamed quality-control problems. Weekly stock closes and latest:
Friday close: $38.44, --$5.00
Source: Bloomberg News
