Black,Blue and Gray All Over
You’ve come hoping for a glimpse beneath the image of icy control that Kelly Gray projects as signature model for St. John Knits Inc., the elegant, Irvine-based fashion house her parents founded nearly 40 years ago. You’d wanted to get her out from behind that desk adorned with ceramic and toy Chihuahuas, the one she has occupied since father Bob appointed her company president in 1996.
One idea was to catch Gray at a clothes fitting, part of the preparation for a photo shoot in Wyoming. But no. The company spokeswoman says that won’t work. How about accompanying Gray on one of her regular tours of the main St. John factory? Maybe you’d get to witness the Grays’ renowned attention to quality that has helped make their classic knitwear line a fixture of the well-heeled woman’s wardrobe. Or she might interact with a member of the 4,100-strong work force that the Grays refer to as their extended family.
This the publicist finds agreeable.
Once you arrive at the cavernous factory near John Wayne Airport, however, the tour seems as scripted as an infomercial. Gray breezes past a dizzying array of sewing machines, garment presses, crochet tables and clothes racks. Occasionally she exchanges pleasantries with a supervisor. At one point she leans over a worker engaged in an intricate stitching process. But that’s as spontaneous as it gets.
This is not surprising. A passion for control has marked St. John ever since Bob and Marie Gray founded the company in 1962. Gray himself unapologetically characterizes their management style as “very hands-on” -- it extends, a former employee says, to “worrying about whether the company vehicle is washed or not.” In a departure from the apparel industry norm, they also brought almost every aspect of the production process in-house, eschewing contract labor in the quest for tighter control over quality.
The Grays today are the envy of any family-operated business. Between the three of them, they earn about $3 million a year from the business. Sales last year broke $300 million for the first time and Bob Gray talks about reaching $400 million in the near future. “We’re probably one of the major apparel firms in the U.S., at the level of a Ralph [Lauren], of a Donna [Karan], of a Calvin Klein,” he enthuses.
The St. John line--ranging from $100 T-shirts to $6,000 couture outfits--doesn’t have the glitz of some of its rivals. But that doesn’t matter to the trend-proof denizens of Beverly Hills, San Marino and Newport Beach who wouldn’t be seen in anything but a flawless $1,000 St. John suit with matching shoes and handbag. The impeccable look, high quality and personal service add up to a potent formula. “They’ve had a very singular focus on who their customer is,” says Neiman Marcus merchandiser Ann Stordahl, a big fan of the Grays. Customers have included such luminaries as Hillary Rodham Clinton, broadcast icon Barbara Walters and singer Toni Braxton.
The family gave up some control in 1993 when St. John went public. The Wall Street beast can be a rodeo ride for any company, the thrill leavened by the relentless demand to meet quarterly earnings targets. In St. John’s case, its flirtation with the public roughly coincided with Kelly Gray’s ascension to the executive ranks. And when earnings did not meet expectations for two straight quarters in 1998, the stock tumbled to an all-time low of $13 a share.
At the same time, an ambitious, Kelly-inspired foray into home furnishings disintegrated into nasty litigation with the Grays’ partners, Orange County’s Amen Wardy family. The setbacks seemed to confirm skeptics’ reservations about Kelly’s abilities. But the family tightened the reins again, combining with Vestar Capital Partners of New York in a $522 million buyout in July 1999 that removed St. John from the public markets. The family also settled the Wardy litigation and several suits filed by angry shareholders.
The official line these days is that decorum has been restored. Bob and Marie are the proud parents, with daughter Kelly carrying the tradition into the next generation. “She has the eye for design, she has a great vision for the company and she has a head for numbers,” crows Marie.
But many successful family businesses falter during the transition to the second generation. Can the 33-year-old president keep the $300-million-a-year St. John Knits all in the family?
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WHEN YOU FIRST INTERVIEW KELLY ANN GRAY AT HER OFFICE IN THE St. John Design Center, one of several nondescript buildings the company occupies in Irvine industrial parks, she is crisply attired in a black jacket and white blouse from her Griffith & Gray collection and Gucci motorcycle boots. Her chiseled features betray her Slavic roots. She resembles the actress Glenn Close. A safety gate in the doorway prevents Nikki, her pet Maltese, from running off. Another Maltese, Lexy, Chili the Chihuahua and Bailey and Amber the Yorkies pass their day in her mother’s office.
Gray fields questions in a businesslike manner, her cadence at the end of a sentence often making it clear when she wishes to move on to another subject. The voice is husky, the jargon sometimes unwieldy--”I have input in sales as far as coming up with ways to incentivize people,” she says at one point. Smart, poised and professional, she could be Irvine’s answer to Brooke Logan, the glamorous blond fashion magnate of the daytime soap opera “The Bold and the Beautiful.”
“She’s very nice, very accommodating,” says Kevin Balch, a former manager in St. John’s shipping department. “She tends to put on a business face. [She doesn’t] want to come across as an airhead.”
As the company’s president and its signature model, she now earns a base salary of $700,000. Her typical workday starts at 7:30 a.m., her duties spanning design, marketing and, more recently, sales. Says Jeannette Chang, senior vice president at Hearst Magazines International: “Where there’s a problem, she gets right to it. She does not let a stone go unturned.”
Amid the whirl of meetings and phone calls, she always has lunch with her father and mother in one of the company “bistros.” “We are very close,” she says, adding that her father is “very generous with his time.” Does she get a lot of appreciation from him? “I wouldn’t say a lot,” she replies with a laugh. “His approval is not gushy and flowery. It’s earned. He’s much more approving as a parent than as an employer.”
Away from the office, Kelly Gray skis, reads Sidney Sheldon potboilers and works out with a retinue of three personal trainers. “They compete to see who can make me hurt the most,” she says. Among her automobiles is a Mercedes Gelndewagen, an all-terrain vehicle also known as the “Popemobile.” There are only a handful in all of Orange County, she reports.
In January 1999, she divorced her husband, British musician Michael Blue, after five years of marriage. According to court records, Blue got a $600,000 payment as part of the divorce settlement; Kelly changed her last name back from Gray-Blue to plain Gray. “We just weren’t marriage material,” she explains with a sigh. “But we’re probably closer friends now than we were the last year of our marriage.”
Beyond that, Gray doesn’t reveal much during the conversation. “Kelly’s a little shy, a little reserved,” notes Amen Wardy Jr., a close friend before their ill-fated business venture. “You’ve got to be real close for her to open up.” But, perhaps unwittingly, she drops a few clues.
Clue No. 1: Gray tells you she is building a house for herself in an exclusive Newport Coast enclave. So you ask how big the parcel is. The custom hillside lots, many of them with ocean views, average half an acre and go for $2 million to more than $4 million. Some buyers have amassed multiple lots for estate-style homes. But Kelly can only reply: “How embarrassing that I don’t know. A quarter of an acre, maybe less?”
Clue No. 2: She discusses an e-mail she recently received from a young girl. The e-mail was addressed to “Miss St. John” and, as Kelly relates it, the writer said “her mom was very hard-working and didn’t have a whole lot of money.” She asked if Kelly could “find a way to sell her something at a really big discount so somebody would do something nice for her mom.” How does the story end? “I couldn’t tell you that,” the company president says. “I just am afraid it might get me into a whole heap of trouble.”
Clue No. 3: She refers to “Mr. Gray” and then hurriedly corrects herself--”My dad.” You wonder if perhaps you misheard. But after you finish the interview, you go downstairs to the office of Kelly’s mother, Marie, a picture of elegance in her leopard-print top. While you’re sitting there, Kelly dashes in, opens a bureau drawer and grabs a pack of Marlboro Lights. She is on her way, she says, to see “Mr. Gray.” Balch, who left the company last year to take a job at another local apparel manufacturer, confirms that almost everyone at St. John Knits uses the formal appellation when addressing Kelly’s father.
The clues leave you with a clear sense that Kelly Gray inhabits a rather insular world, one in which the details of a $2-million purchase escape her and where family and business have merged into a seamless whole. Says Balch: “It boils down to control.”
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THE NEAREST THING TO LOSING CONTROL THAT ST. JOHN KNITS experienced prior to 1998 was probably its annual sale. Held at a company warehouse, it usually develops into a mob scene with hundreds of women sleeping overnight in the parking lot for a chance to buy suits at 70% off. That kind of devotion grew from the vision of one woman.
In 1962, Marie Hermann, a Yugoslavian-born model who used St. John as her professional name, decided to show her fiance, sportswear salesman Bob Gray, that she could dress fashionably on a shoestring budget. So she knitted her own dress. After Bob took her designs to Bullock’s Wilshire department store and a Los Angeles boutique, he returned with orders for 84 more. The couple, who initially worked out of their San Fernando Valley garage, employed both their mothers to help finish the garments.
St. John did $92,000 in sales in its first year; by the early 1970s, sales had topped $1 million and Bob and Marie Gray had moved the business from Los Angeles to Irvine. “We did every aspect of the work,” he recalls. “I used to be the shipping clerk while she ran the factories; I did the selling, she did the designing. It was very easy for us to be very hands-on.”
Kelly Gray first got hands-on at St. John when she was 12, answering phones and wrapping boxes during summer vacations. “I wasn’t great at being a child,” she admits. “I was very good at working and getting on with other people that had jobs.” At 15, Gray, then a fresh-faced brunet, became the company’s signature model. Through the company’s advertising, she would metamorphose into the ultimate cool blond, what Vogue publisher Richard Beckman calls a “great icon” for the St. John brand. Whether posed with kilted Scotsmen, turbaned Indians or a Kenyan cheetah, she always conveys poise and inaccessibility--there, but not quite there.
Kelly Gray spent less than a semester at Stephens College, a private girls’ school in Missouri, and did some modeling while she lived in Chicago. She refers to the period as a “blink.” But soon she was back in the St. John fold and, in 1991, was appointed creative director, learning the business “literally through observation,” as her father puts it. “She came into the business in the design world and it was a natural evolution for her to actually merchandise the line,” he says.
By that time, Escada, the German fashion house, had acquired a majority stake in the company, and the St. John business concept had been fully implemented: design classic, Chanel-style knitwear, sell most of it at below-couture prices and provide couture-like quality.
Putting the concept into practice required tremendous attention to detail. For wool supplies, the Grays dealt only with farms in Australia where the sheep are discouraged from being too frolicsome. “Their wool is a little healthier if they don’t drain themselves so much running up and down hills,” Kelly explains. The Grays went on to develop the proprietary Santana yarn, a springy combination of wool and rayon that is twisted in such a way that it rarely wrinkles. Eventually the entire manufacturing process would be under St. John’s control.
While the St. John factory is highly automated, much of the production is still done by hand. Workers stitch intricate seams, decorate gold-plated buttons with enamel, remove loose threads and attach tiny sequins to garments with tweezers. A former St. John Knits employee who asked not to be identified recalls watching a worker who was packing garments “sweat bullets” as Bob Gray loomed over him, assessing his every move.
“I really can’t think of any other [apparel] company that operates in such a way,” marvels Neiman Marcus’ Stordahl.
After Escada decided to sell its stake in 1993, the company went public at $17 a share. Wall Street was soon rewarded. Sales for fiscal 1995 increased by 26% to $161.8 million and earnings rose 31% to $19.6 million; the following year sales were up 26% to $203 million and earnings rose 38% to $27.1 million. While Neiman Marcus, Saks Fifth Avenue and Nordstrom accounted for nearly 50% of sales, St. John also retailed through its own boutiques, of which it now has 21.
In April 1996, Bob Gray cemented the family’s control, appointing his daughter to replace Robert C. Davis as president. Despite her youth and lack of college education, he had no doubts about the wisdom of his choice. “She had more street smarts than an MBA in any field,” he says.
Investors reacted with less confidence the day the appointment was made, knocking the stock down 7.5% to $31, a paper loss of millions. The new president made the rounds of the Wall Street analysts. “I thought Kelly was very well-versed in design,” recalls Holly Guthrie, a Philadelphia analyst with the investment firm of Janney Montgomery Scott. “But it was hard to judge what her knowledge of the business was. . . . She always seemed to be in a hurry.”
Still, the stock rebounded by the fall of 1996 to $50. In fiscal 1997, sales climbed 20% to $242.1 million and earnings rose 27% to $34.4 million. St. John diversified, introducing the lower-priced SJK line and a shoe line. Subsidiaries were opened in Japan, Italy and Mexico. Most ambitiously, the company launched its home furnishings division, an idea Kelly Gray brought to her father. A former employee perceived it as the CEO giving his daughter a measure of independence. “It was like, ‘Here’s your first little project.’ ”
But in 1998, St. John’s polished facade cracked. Quality control began to slip at factories strained by increased production. On a visit to a local mall, Bob Gray inspected his products and, to his horror, found pockets askew and buttons loose. “No one ships everything perfect all the time,” Kelly points out. “But things were getting out the door more frequently.” The SJK line failed to attract younger customers and was discontinued after only three seasons.
After second-quarter earnings came in low, the stock plummeted 30% to about $18. Investors filed suit, claiming the Grays were guilty of fraud by downplaying the seriousness of St. John’s financial woes. Perhaps most dismal of all was the fate of the young president’s home stores.
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KELLY GRAY FIRST MET AMEN Wardy Jr. in 1990 and they soon became fast friends, often skiing together in Aspen. “I shared with her my most intimate personal concerns and interests,” Wardy recalled later in a court document. In April 1997, he gave her a tour of the home store that Amen Wardy Sr. had opened in the Rocky Mountains resort after his Orange County women’s clothing boutique went bankrupt. The home store was a whimsical wonder, selling everything from $5 napkins to $100,000 armoires along with such oddities as $140 clusters of rubber bananas. Enthralled, Kelly suggested they could roll the concept out into a national chain.
By that time, other apparel houses, notably Ralph Lauren, had moved into home furnishings in a bid to enhance brand recognition. When Kelly’s parents visited Aspen, they also were impressed. The older Wardy “was probably the greatest salesman I’ve ever met,” says Bob Gray. “Hell, he sold [Marie] $5,000 worth of goods! And she didn’t even go in to buy anything!”
In August 1997, the Grays signed a joint venture agreement that gave them 51% of Amen Wardy Home Stores in return for an initial investment of at least $2 million. The younger Wardy, who was appointed CEO, moved to an office at St. John.
The partners quickly opened six stores from Boston to Las Vegas. St. John’s investment in the chain reportedly ballooned to $9 million. But after only a year, Wardy Jr. was fired. With most of the stores unprofitable, things got so bad that St. John tried to sell off inventory to staff at a discount. “It was really junky,” recalls a former employee. “And it was still way overpriced.”
In October 1998, Wardy Jr. brought a wrongful termination suit. The issue, he claimed, was control. According to the complaint, St. John “dominated and directed all of the operations of AWHS,” unilaterally deciding, among other things, the location of stores. Then, as St. John’s earnings took their dive, the Grays allegedly reduced the home stores to the “role of corporate ‘sacrificial lamb’ ” as part of a “malicious effort” to divert attention from the “true reasons for, and true magnitude of, the poor performance of St. John.” Wardy claimed he was fired for refusing to go along with “accounting gimmicks” that would have enabled the Grays to take tax credit for 100% of the home stores’ losses. For fiscal 1998, those losses amounted to more than $2 million.
The Grays responded with a countersuit in which they accused the Wardys of an “utter failure to perform” their obligations and of misusing the joint venture to benefit the Aspen store. Things got so nasty that a judge jokingly suggested that the legal proceedings be held in family court. St. John security guards prevented Wardy Jr. from entering his office and employees were instructed not to speak to him or his father. “It was like ‘Family Feud,’ ” recalls Balch.
As part of a May 1999 settlement, Wardy Jr. kept the Las Vegas store; the Grays, who closed down three of the six outlets, retained stores at the South Coast Plaza mall in Costa Mesa and in Scottsdale, Ariz., which they operate under the St. John Home name. It’s not a subject Kelly Gray likes to revisit. “Oh, if I could just possibly have this one thing not to have to talk about one more time!” she exclaims with a groan. Her father is blunt: “That’s the one time I hired a partner and it was disastrous.”
For Kelly, there is one obvious lesson to be drawn from the debacle. “It was something that I knew going in, that you shouldn’t do business with friends,” she says. “It just doesn’t mix.”
Some wonder, though, if the Grays’ autocratic habits would sabotage any project involving cooperation and compromise. “Basically, everything is done their way first,” says Balch. “If that fails, they’ll ask for suggestions. That may not be the most sound way to manage a company of that size.”
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YOU MEET WITH BOB GRAY in his office at St. John headquarters. His secretary serves you water in a crystal glass. You’re prepared to be intimidated--you’d been told to be there punctually, that tardiness is not appreciated. He’s been known to take off on trips in the Falcon corporate jet without executives who failed to arrive on time.
Gray is a tall, imposing man with blue eyes and a ruddy complexion, personable and more relaxed than his daughter, it turns out. With nearly 50 years as a salesman behind him, he presumably can handle anything.
Gray makes no apologies for his management style. “I could certainly over the years be accused of over-managing, of being into areas that you say, ‘What’s a CEO doing at that level?’ ” he says. “But that’s just the way I’ve managed the business.” He adds: “If you’re a General Motors, you obviously can’t micro-manage. We’re not that big or even close to it. At [our] size, I still believe two or three people can keep their eyes on the ball and on the business.”
The CEO is confident that St. John Knits is back on track, particularly now that it doesn’t have to answer to Wall Street. Trying to sustain 20% growth was too much. “I believe 10% is a realistic number for a company to grow and continue to show nice profits.” In fiscal 1999, sales rose 6.5% to $300.3 million.
As for his daughter’s job performance, Gray is full of praise, crediting her, among other things, with introducing a more youthful influence to the product line. “Kelly has brought in a new and younger [customer]. That’s where our growth is coming from.”
But as Bob Gray contemplates retirement (the board of directors recently extended his contract for another year), significant issues remain, including the future of the home stores.
“The idea is a store that’s driven by fashion trends,” Kelly says. But even that broad mandate doesn’t adequately explain a South Coast Plaza store that looks like an upper-crust garage sale with its inventory of $140 martini shakers, $285 Blues Brothers statuettes, $240 leopard-print dog beds and a melange of bathrobes, wine racks and chess sets. According to Wardy Jr., “They didn’t hire anybody in that division who has any [home furnishings] experience at all.”
The bigger concern is succession. “That’s the toughest single challenge for a family-owned business,” notes David Harman, former director of the Family Business Council at Cal State Fullerton’s School of Business and Economics. Harman says only one in three family businesses passes from first to second generation, and the attrition rate climbs to 90% from second to third.
Asked if she would like to take over as CEO, Kelly Gray says no. “Why does everybody ask me that? I love the job I do today.” The CEO has to “make sure all areas are operating smoothly, profitably, [make sure] you’re not building up inventory. Does that sound like a fun job to you?” Besides, she says, “I like having my father as a boss. I like having someone to bounce ideas off of.”
For his part, her father is looking for a chief executive “who has a lot of credibility in the apparel field” and will complement Kelly, who he suggests is “not ready to take over yet.” Even if he does find a CEO who meets his high standards, “Mr. Gray” intends to remain on the company’s board.
“Mr. Gray’s great,” says Wardy Jr. “He runs a tight ship. He’s done an incredible job. But now when he’s ready to get out of it, there’s no one to take over.”
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AS KELLY GRAY DRIVES between St. John buildings--not in the Gelndewagen, alas, but in her mother’s Audi station wagon--she admits that the succession issue is “discussed more frequently than anything else” in her family. But she believes her father can relinquish the reins. “I know that he’s a man of his word, and when he makes up his mind to do something, he’s never done it halfheartedly.”
Back in the lobby of the Design Center, where poster-sized pictures of herself hang on the walls, Kelly seems to relax. But there is one thing that still bothers her: the face of a thousand fashion layouts is not sold on being the subject of a magazine story. “It’s scary because it’s something that’s not in your. . . .” She pauses. “It’s definitely not in your control.”
