Clothier Cites Quality Snags as Stock Drops
The detail-oriented executive who runs St. John Knits was scouring the clothing racks at South Coast Plaza, and what he found was not pretty.
Well, pretty, maybe, but not perfect.
Amid the racks of stylish and immaculate St. John apparel, sought by well-heeled women from Barbara Walters to Hillary Clinton, were garments with crooked pockets and loose buttons.
In a move that exemplifies a company obsessed with perfection, Chief Executive Bob Gray quickly dispatched St. John inspectors to high-end stores around the nation to assess the situation.
On Friday, the company disclosed the problem for the first time. As much of 5% of the St. John garments inspected had defects, leading the Irvine-based manufacturer and retailer to recall the clothes for repairs.
Such take-charge action is precisely what loyal St. John customers expect of a brand that moves them to plunk down thousands of dollars for an outfit.
But the setback also was a costly one, and on Friday it rattled investors who have come to expect the same high-quality results in St. John’s financial statements.
For the first time since the company went public in 1993, St. John’s earnings are expected to fall short of expectations, and investors reacted accordingly. Its shares slid 12%, or $5, to $38.44 in New York Stock Exchange trading Friday. It was the lowest closing price in a year.
Be that as it may, Gray thinks he did what he had to do.
“St. John as a company has been built on fine-quality garments, and we have no intention of sacrificing this quality,” Gray said Friday in a conference call with Wall Street analysts.
“The main thing I want to get across is this is not a trend,” he said. “I think if you go out to the stores today, you will find the fall product . . . will be absolutely pristine.”
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The recall involved the spring line, and garments that were discovered to be defective in February were repaired and returned to stores over a two-month period.
The news was a bit worrisome to loyal St. John customers such as Cynthia Graff, a Newport Beach resident whose wardrobe is about 90% St. John.
“They’re known for their quality. So, as a consumer, I would be distressed if their standards have fallen,” Graff said. “Let’s just say I’ll check each piece a lot more closely.”
But Graff doesn’t intend to back off her purchases, because she considers St. John clothing classic and durable, such as the black knit skirt that she bought seven years ago for about $250 and wore throughout her pregnancy by simply loosening the elastic.
Patricia L. Murphy-Kessinger, a partner in the McGladrey & Pullen accounting firm in Irvine, said she is comforted by the fact that the chief executive is so closely watching the product.
“The fact that they voluntarily pulled the 5% of the product that needed to be fixed is an indication that they take quality seriously,” she said.
Forced to evacuate during the 1993 Laguna Beach firestorm, her husband immediately took to the car her wardrobe of St. John Knits--which cost $700 to $1,000 per outfit. “He thought that they had more value than the [financial and tax] records that I was pulling,” she said.
Gray said that St. John’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.
As a result, some defective merchandise was slipping into stores.
“It happens because the inspectors don’t do their job,” Gray said. “We also are pushing them very hard.”
To remedy the problem, Gray said, St. John plans to hire more employees and cut back on overtime. The company also has adjusted inspection procedures.
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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.”
Holly Guthrie, an analyst at the Philadelphia investment firm of Janney Montgomery Scott Inc., said St. John will have to work through its growing pains.
“Managing the growth is the key, and managing it profitably,” Guthrie said. “It’s challenging and difficult, and it’s the task at hand.”
On Thursday, St. John warned that second-quarter profits would fall short of analysts’ expectations because of lower-than-expected shipments.
“People that had been producing garments were now repairing garments,” Gray said.
The company expects to earn about 57 cents a share, or $9.5 million, in the period ending Sunday. Wall Street was expecting about 61 cents a share, or $10.2 million. In the year-earlier period, the company earned 52 cents a share, or $8.8 million.
Gray said he still expects St. John’s sales to rise by 20% this year, and 15% to 20% in 1999. Sales in 1997 totaled $242 million.
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.
Last year, St. John had to overcome “a production glitch” related to a shortage of knitting machines for a product that was selling well, Guthrie said.
The company has 16 boutiques and seven outlet centers throughout the nation and sells in high-end specialty and department stores including Nordstrom, Neiman Marcus and Saks Fifth Avenue.
The company has production plants in Irvine, Van Nuys, Alhambra and San Ysidro.
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What Price Quality?
St. John Knits’ stock price fell Friday after the company reported second-quarter earnings would fall below analyst estimates--a slump blamed on quality control problems. Weekly closing stock prices:
Stock Trend
January 2nd: $40.00
Friday close: $38.44
Encouraging Words
First-quarter sales and earnings for 1998 exceeded previous year marks, amounts in millions:
Sales
1st quarter 1998: $68.76
Net Income
1st quarter 1998: $9.22
Details, Details
In response to quality control problems, St. John Knits revamped inspection of its knitting, seaming, pressing and sewing procedures. Finished garments are pressed and fitted on a mannequin to undergo an inspection for the following:
* Buttons, zippers and trims aligned and properly attached
* Garment hangs properly when buttoned
* Pocket flaps centered
* Seams sewn with correct stitch gauge
* Sleeves of proper length
* Width of jacket correct
* Back and front of jacket correctly measured
* No loose threads, spots or fabric irregularities
* Garment gets final pressing before shipment
Sources: Bloomberg News, St. John Knits; Researched by JANICE JONES DODDS / Los Angeles Times
