St. John Knits Seeks to Mend Snagged Reputation

Hips first, the models stalked the runway, prompting appreciative smiles and intermittent applause from wide-eyed admirers.

For buyers, St. John Knits Inc.’s spring line presented a heady array of options, from trim business suits and shimmering slip dresses to billowing evening wear and even a swimsuit.

Throughout the Sept. 1 fashion show, one thing was perfectly clear: St. John knows how to dazzle.

But the production was not seamless. In between presentations at UC Irvine’s Bren Center, Chief Executive Robert E. Gray claimed the runway, mentioning St. John’s sagging stock and declaring his confidence in his daughter Kelly--the company’s 31-year-old president whose ascent within management has been questioned by some.

Although Gray’s comments seemed out of step with the picture-perfect models, they served as a reminder that these are not easy times for the Irvine-based apparel company.

Snarled in a transition period that has stalled many a business, the much-revered St. John is grappling with its growth. Its once-vaunted stock price has been halved in the last two months. This year it failed not once but twice to meet Wall Street’s earnings expectations. And some of its knit garments--once famed for their flawlessness--were recalled because of imperfections such as loose buttons and crooked pockets.

The troubles come at a time when the company is attempting to lure younger customers without losing its grip on its older devotees, women whose passion for the classic St. John knits made the brand famous.

“They base their entire company . . . on quality,” said Janet Bridgford, a longtime customer and stockholder whose family runs Bridgford Foods Corp. in Anaheim. “Once that diminishes, they don’t have a business.”

St. John has, for the most part, maintained a stellar reputation during its 35-year history. For years a darling on Wall Street, it has expanded over time to sell shoes, accessories, coats and fragrances.

Last year, the company launched SJK, a lower-priced clothing line for younger women, and opened a small home furnishings chain called Amen Wardy Home Stores.

This year, the company opened a 50,000-square-foot jewelry and hardware manufacturing plant near Tijuana, which it plans to double in size. It is replacing its South Coast Plaza boutique with a two-story mega-store just steps from Nordstrom, Saks Fifth Avenue and Macy’s, all of which carry St. John products.

“It’s troubling to me,” said Faye Landes, an analyst at Salomon Smith Barney Holdings Inc. in New York. “Clearly they strained their system by growing in all different directions.”

Earnings Warnings, Production Problems

The first shoe dropped in May when St. John said it would not meet analysts’ earnings expectations for the second quarter, something that hadn’t happened since the company went public in 1993.

Then last month, the day before the market’s 357-point nose dive, St. John investors watched aghast as the company’s stock dropped 30% after it warned that third-quarter earnings also would fall short of analysts’ expectations.

The company blamed the downturn in part on production problems tied to its attempt to grow quickly. Gray also acknowledged that the company had shifted its attention from its core customers, a misstep he said has since been corrected.

The news set off a round of worrying.

Analysts wondered aloud whether St. John had veered off course. Customers fretted over news that the company had recalled flawed garments--a stunning revelation for the perfection-seeking St. John.

And with the company’s stock now hovering around $17, some analysts believe St. John--trading at a discount to its peers--may be ripe for takeover.

“It’s one of the best values I’ve seen in the marketplace in 20 years in my industry,” said Jennifer Black, a retail apparel analyst with Black & Co. in Portland, Ore.

Robert Gray, who along with Kelly Gray declined to be interviewed for this article, said last month that he had had no calls from anyone hoping to buy the business. Gray, his wife, Marie, and their daughter have a 17.6% stake in the company, which had sales of $242 million in 1997.

Investors are jittery about the less-than-glowing news from St. John because the company historically has been amazingly sure-footed. Sales have grown at a double-digit rate for 16 straight quarters, and profit has increased fourfold the last six years, reaching $34.4 million in 1997. About 80% of St. John’s sales still come from its knitwear.

While the company’s recent woes clearly alarmed analysts, some have lately begun sounding positive again about the company’s future. Expanding into new areas can be crucial if a company has reached the saturation point with its core customers. Besides, what can it hurt to add a dash of fringe and a few slits to a clothing line that, two years ago, a New York fashion editor described as more Barbara Bush than Sharon Stone?

Black said she thought St. John was more her mother’s style three years ago when she started watching the company. Now she wears it herself, drawn to an array of jazzy new options.

“I live in it. It’s all I wear when I travel,” Black, 41, said. Singer Toni Braxton wears St. John dresses, “and she’s hot. Isn’t that juicy? And, you know, she was wearing Gucci.”

Missing the Mark on Hemlines

One question the company faces as it moves into a new millennium: How far can it reach to win younger, hipper customers without losing its grip on its most faithful followers, many of whom are middle-aged or beyond?

Gray acknowledged in a recent conference call with Wall Street analysts that the company had previously missed the mark regarding skirt lengths, shipping apparel that was too short, especially for the couture line.

This is, after all, a company that has prided itself on making “investment clothing” rather than fashion statements, ensembles worn by both hard-driving businesswomen and the country club set, apparel known more for durability than dazzle.

“They guarantee their products for life,” Black said. “There’s no company I know that does that besides them.”

Customers’ willingness to pay full price for the company’s classically styled knits has historically padded its profit. But some now wonder about the strategy of offering the lower-priced SJK line--not to mention discount outlets.

“It says to the St. John customer: ‘You don’t need to spend $800 or $1,000. Why don’t you buy [SJK]?’ ” one local fashion guru said. “In other words, they’re cutting off their nose to spite their face.”

Gayle Saari, a Newport Beach executive who for years has bought St. John at South Coast Plaza, now makes weekly treks to the company’s outlet store near Palm Springs, where she finds bargains such as a $120 sweatsuit that she figures originally cost up to $500.

“In the last month, I’ve probably purchased five pairs of clip earrings that are just stunning for $35 a pair,” she said.

St. John operates 16 retail boutiques and nine outlet stores, as well as selling through high-end department stores.

The outlets may have more finery than usual of late. Gray said buyers misjudged the amount of clothing needed in company boutiques, which meant apparel had to be marked down and shipped to the discount stores.

Further, in an attempt to boost sales, the company pushed employees to work overtime, which increased costs and heightened the chance for errors. Production problems increased as the company began manufacturing unfamiliar and more complicated styles.

St. John is addressing those problems, hiring hundreds of employees and buying knitting machines, Gray said. He said quality control also has improved, but St. John was plagued again last month by a second recall of clothing, blamed this time on a faulty pattern.

The company said customers are happy with St. John’s newest offerings. More than 1,000 people attended the recent showing of its cruise and spring lines, and the response was “overwhelmingly enthusiastic,” it said.

With Amen Wardy Home Stores not yet showing a profit, the company recently fired the subsidiary’s chief executive, Amen Wardy Jr., which at least one analyst considered a wise step.

If the Grays aren’t accustomed to quite these sorts of very public difficulties, they have faced many a challenge since they launched their business from a garage 35 years ago.

It was Marie St. John who breathed life into what was to become a family dynasty in 1962 when she bought a knitting loom and began making outfits.

Robert Gray carted some of his then-fiancee’s Chanel-like designs to several department stores and returned with 84 orders. By 1969, St. John Knits had $1 million in sales.

When Robert was struggling with health problems in 1989, the couple sold their steadily growing business to the German apparel company Escada for $45 million. Four years later, Escada took St. John public, and the Grays and their managers kept about 20% of the shares.

Marie, 62, is still the company’s vice chairwoman and chief designer.

While Robert prides himself on his family’s management of the company, some investors have from the onset questioned moving daughter Kelly into management. When she was appointed president three years ago at the age of 29, the company’s stock lost 7.5% in one day.

The image of Kelly Gray, who is slated to eventually move into the company’s top job, is not that of a staid chief executive. For starters, she is one of the youngest presidents of a New York Stock Exchange-traded company. She serves as St. John’s signature model and reportedly favors traveling to exotic locations for fashion shoots.

Invitations to her 32nd birthday party this Saturday say the celebration at the Twin Palms restaurant in Newport Beach will re-create the 1970s scene at Studio 54, “a dazzling and deliciously intimate celebration of the best and wildest party that ever was!”

She clearly is climbing the ladder of influence--at least for a segment of Americana. Vanity Fair magazine will include her in its November pictorial titled “Women in America, a Portrait of Influence and Achievement.”

CEO Unexpectedly Extends His Contract

Supporters say Kelly Gray is now primed for the chief executive post.

“She’s been involved in the business for so many years,” said Lora Todd, assistant manager at Escada at South Coast Plaza, now one of St. John’s competitors. “I think she’s positioned very well to take over for her dad.”

But the ascent seems stalled, at least for the moment.

Although Robert Gray, 72, hinted two years ago that he would resign this year as chief executive, his contract was recently extended until May 31, 2000. He denied that this decision was linked to investors’ uncertainty about his daughter.

With St. John “in the doghouse of late,” as one brokerage firm recently put it, few are surprised that the sometimes hot-tempered patriarch is staying put for a while.

“He’s going to step in and save this,” said a family friend and industry insider who asked not to be identified. “He’s probably furious that he has to.”

A Varied Pattern

Irvine-based St. John Knits Inc. has hit choppy water. Sales continue to grow at double-digit rates, but earnings have been lackluster in the last two quarters. The stock also has been retreating.

Stock Prices

Monthly Closing Prices and latest

6/6/97: Company announces second-quarter earnings up 31%; sales jump 32%

3/3/98: Company reports earnings up 25%; sales rise 22%

5/28/98: Company says it won’t meet analysts’ earnings expectations in the second quarter--the first such warning since St. John went public in 1993.

8/25/98: Company warns it will fail to meet analysts’ expectations for a second consecutive quarter.

9/98: Friday close--$17.00

*

Quarterly Sales, (in millions)

1998

3rd qtr:$67.7 million

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Net income (in millions)

1998

3rd qtr.: $7.3 million

* Source: Bloomberg News