WWD.com/fashion-news/fashion-features/selling-to-the-converted-761802/

In the mid-Seventies, it took an enormous amount of persuading to convince Norman Wechsler, then-chairman of Saks Fifth Avenue, to feature St. John Knits Inc. in the windows of the New York flagship.

This story first appeared in the June 18, 2002 issue of WWD.  Subscribe Today.

It mattered little that St. John’s first big retail account had been reaching solid volume levels with the line for over 10 years. “Why should you be in the window?” Wechsler asked. “Nobody ever heard of you guys.”

But in 1976, after three years of urging by Robert Gray, Wechsler relented. Although the first retailer to pick up St. John was the now-defunct Bullocks Wilshire in Los Angeles in 1962, the support by Saks increased the line’s popularity not only among shoppers, but with buyers, as well.

Today, Saks says St. John is one of its regularly featured designers — alongside the likes of Giorgio Armani, Carolina Herrera and Oscar de la Renta — in its New York store windows. The retailer carries it in 54 of its 61 stores, 90 percent of every collection the Irvine, Calif.-based company produces.

About half of St. John’s $366 million in 2001 sales was generated by business with eight department store accounts, including Saks, Neiman Marcus and Nordstrom. Of these accounts, by yearend, there will be 40 shop-in-shops. Seventy specialty stores account for 20 percent of the company’s annual volume and St. John-owned boutiques account for the remaining third.

No major department store dares to take as harsh a tone as the late Wechsler did 26 years ago. These days, it’s only the most diplomatic of comments.

“We are fortunate to have them as business partners for over 30 years,” said Burton Tansky, chief executive officer and president of The Neiman Marcus Group, the second retailer after Saks to carry the line.

Barbara Lovejoy, a Neiman’s shopper in Atlanta with seven knit suits in her closet, explained one reason she thinks of St. John Knits when she’s in the market for a new outfit. The knits, a springy wool-and-rayon yarn that has the ability to be “blocked” with steam and pressure, allows the garment to accommodate size variations. For example, a woman can buy a knit in one size and months later go back to stores to block the outfit up or down multiple sizes, depending on her needs. This can be done both prior to purchase and years later. Although the price tags are hefty, ranging from $100 for T-shirts to $6,000 for couture suits, to Lovejoy, the blocked feature makes a St. John item worth every penny.

“I had a size 6 once and they blocked it to an 8,” said Lovejoy. “There is not another designer that you can do that with. It’s the only brand I don’t mind spending money on because I feel like I’m getting my money’s worth.”

Jaqui Lividini, Sak’s senior vice president of fashion merchandising, said St. John is “the epitome of what all brands are trying to do. Many of their customers will only wear St. John. What brand would not want to have that?”

Over at Nordstrom, Monica Ward, corporate merchandise manager for the company’s 83 full-line stores, credited St. John with the success of the retailer’s bridge business, a partnership that has spanned 23 years. “To say that St. John has a loyal following is an understatement,” she said. “Though it never fails to amaze me, the reason our customers love the brand is simple: St. John does an outstanding job of delivering high-quality, seasonless designs that are classic without looking dated.”

Bloomingdale’s is a relative newcomer to the fold, having only carried the line for the past four years in just two of the chain’s 28 stores. Michael Gould, chairman and ceo of the Federated division, said Bloomingdale’s will open its first St. John in-store shop this month at its flagship in New York. The retailer also plans to add St. John departments in five additional stores by August.

“We just looked at the success of the line with upscale retailers,” Gould said. “They have a desire to want to grow with us as an upscale resource.”

Consistent sell-throughs on regularly priced merchandise also scores points with retailers, as does St. John’s commitment to customer service.

“They’re probably much more attuned to our selling associates in the stores and how they educate and work with us in motivating them than many designer brands are,” said Ann Stordahl, Neiman Marcus’ senior vice president and general merchandise manager for women’s ready-to-wear. At least twice a year, the retailer will send key St. John associates to the company’s headquarters to view upcoming collections and take seminars on product education.

Stordahl said St. John has been one of the fastest-growing lines at Neiman’s 33 stores in the last decade. Over the last two years, St. John’s combined businesses overall had an average growth rate of 12 percent per year.

Department stores have been doing what they can to reinforce the brand with customers. “Saks gives St. John prominent location,” pointed out analyst Carla Casella at J.P. Morgan Securities. “It’s the first shop when you get off the escalator.”

And yet the wholesale business has stumbled since 9/11, putting the spotlight financially on sales at St. John-owned boutiques.

Sales in the second quarter ended April 28 decreased 4.9 percent to $92.3 million from $97.1 million last year, due to the weakened wholesale business. Because 7 percent of the company remains in the public’s hands after St. John went private in 1999, it still has to release financial results. Investment firm Vestar controls 77 percent of the company and the Gray family retains the remaining 16 percent.

“There’s a shrinking market of better stores,” said Robert Gray, noting that he recently pulled merchandise from Macy’s West and two other unnamed major accounts to reduce exposure of the product. “There is Neiman Marcus and there’s Target and in-between it’s no man’s land.” But Gray said he is not planning to close any further retail accounts.

Casella said she believes the sales decrease at wholesale is due to a weakness in the luxury sector overall. “I’ve not seen any department store put something else in St. John’s place,” she said.

“That translates into one thing, consumer demand,” said Kurt Barnard, president of Barnard’s Retail Trend Report, of the recent figures. “Consumers buy what they absolutely need and go shopping for low prices. They’re trading famous brands for unknown brands that may be good and sometimes even better.”

Net income was also flat with the same quarter last year at $7.3 million, due to the company’s high interest from debt. Debt is currently $235 million, related to the company’s private move. Casella pointed out that usually a company repurchases stock with debt or with the help of an investor. In St. John’s case, the company repurchased stock in both ways.

The Grays prefer to look at the strong demand for the product at their own stores, pointing to comp-store sales in their full-priced stores increasing 9.9 percent during the quarter and 8.5 percent for the last six months. Company-operated boutiques and outlet store sales rose a total of 3.4 percent, or $3.8 million, to $115.9 million for 2001. Comp comparisons for the boutiques increased 0.6 percent.

Analysts side with the Grays. “I think the fact that they don’t have too many boutiques is a huge benefit,” said Casella. “If you’re oversaturated even a little bit, it’s hard to show same-store sales gains. It’s also easier to show same-stores sales gains if you are more exclusive. It adds consumer interest.”

It was a similar crisis at department stores back in the Eighties that first prompted St. John to open its own store. Retailers B. Altman, Best and Co., I Magnin, Lou Lattimore, Martha’s and Bullock’s Wilshire were all going under because of a rash of mergers, consolidations and closings. “We weren’t getting enough exposure,” said Robert Gray. The first St. John’s store went up in Palm Desert, Calif., where the Grays had a second home.

“It seemed like a good place to get our feet wet,” said Marie Gray. “If we weren’t too successful, nobody would notice as much.”

The store thrived and units slowly began to spring up in Denver, San Antonio, Honolulu, Boston and New York.

Currently, there are 30 company-owned stores (including units in Hong Kong, Japan and Munich) and 10 outlets. Only two home stores remain, one in South Coast Plaza in Costa Mesa, Calif., and another unit in Palm Desert (there is also an outlet store in Primm, Nev.).

An average company-owned store is 3,500 square feet. But the boutiques are getting larger; the largest of them being between 12,000 and 15,000 square feet, to accommodate a growing number of collections.

The company hopes to gain market share by expanding its retail division this year. Plans are to place a total of five boutiques in the U.S. by the end of fiscal 2002. Two stores opened in May. Munich will close in July, bringing the total full-price store count to 32 by yearend.

It was H.W. Mullins, the former Neiman Marcus chairman who joined the company briefly in 2001, who targeted growth for St. John boutiques. But Mullins lasted eight months, leaving Robert Gray to postpone his retirement and carry on the expansion.

Company executives won’t say specifically where the stores might go.

“In retail, the biggest challenge right now is finding new locations,” said Bruce Fetter, St. John’s co-president and chief operating officer. “If we can find a location, we’ll do it.” Fetter said St. John boutiques are in almost all key spots where competitors like Armani, Escada and Max Mara are established. But the firm is taking a better look at the Midwest and South, where “there is an extreme amount of wealth but not any place to spend your money,” said Kelly. A forthcoming trip to Vancouver and Toronto might uncover Canadian prospects, as well.

Analysts believe there are some good market opportunities out there for St. John.

“Look, the name is a good name,” said Barnard. “If correctly executed, I think their boutiques might very well be on their way to bypassing their wholesale business.”

Said Casella: “Because they’re not oversaturated, they probably do have opportunities where they can expand. They can track where their customers concentrate. They can’t go into every market, but they have some more places domestically.”

It was when St. John became a division of Escada in 1989, a relationship that lasted four years, that the company began its international retail expansion. By 1997, nearly 90 stores in Europe carried the collections and the company had set up subsidiaries in Japan, Italy and Mexico. Today, that number has grown to 195, including a presence in Dubai and Russia. With the exception of four company-owned stores in Japan, Munich and Hong Kong, all 35 St. John stores abroad are franchises. “I learned from Wolfgang [Ley, chairman of Escada AG], you’ve got to be international,” said Robert Gray.

St. John recently signed on with a distributor in China for two freestanding stores to open in October. “We are interested in experimenting there,” Gray said. “There’s a huge market there. But we would not go there ourselves. Our distributor is taking all the risks.”

In April, St. John outlined a Japanese expansion plan that would increase its distribution from eight to 30 locations in the next three years, tripling its sales volume there. St. John will also relocate two existing boutiques. A search for a flagship in Tokyo is under way, “hopefully in the next three years,” said Kelly.

In the early days, the emphasis was on how to hang the clothes, not store decors. Recently, Kelly Gray and an in-house architect have created environments somewhat reminiscent of Chanel stores, with beige wood and beige carpeting throughout. The reference to Chanel is not by accident. “I spent a lot of time as a teenager shopping,” Gray said. “And back then, it would have been Chanel, Armani or Karl Lagerfeld. And I just remember going into Chanel and how it made you feel. I wanted us to have our environment probably a little warmer than Chanel.”

Because Kelly Gray, as creative director, adds a new detail to each new store, the look of the fleet is constantly evolving. Usually, the stores are divided into sections, with the most recent collections placed at the front of stores. Evening is the second collection customers see and in the back hang couture and St. John Sport, usually organized by color.

One of the three current jewels in the crown has just been unveiled in San Francisco. It’s “a little more modern with more contrast,” she said. The 12,000-square-foot store opened over Memorial Day weekend at the Four Seasons Hotel on Market Street. There are sections of dark wood, more glass than other stores, luminous fixtures and, instead of faux finished paint, plaster with a smooth texture. The carpet, a staple at all boutiques, is still there “out of sensitivity to our salespeople,” she added. The boutique is projected to make $10 million its first year.

The flagship at 53rd Street and Fifth Avenue in Manhattan is the moneymaker, according to Robert Gray, doing in excess of $20 million a year, some $1,500 a square foot.

And the South Coast Plaza store near the company headquarters in Costa Mesa, Calif., is considered home base. The 15,000-square-foot boutique features two levels dedicated to knits and two stories to home products. To keep bored husbands happy, there is a bar and two television sets.

The store requires sales associates to follow up with customers within three days of a purchase. Sales associates at St. John shops aim to build personal relationships with customers. “We host a lot of events in stores,” said Hedy Woodrow, senior vice president of retail. “We have birthday parties for all clients. Our clients build friendships there. There is constant `clienteling,’ making sure that she has received her outfit, it fits correctly and is delivered.”

Woodrow recalled the story of a sales associate who was flown to the house of Utah Jazz basketball star Karl Malone for his wife’s birthday. “He had actually purchased a gift certificate for $100,000,” she said. “When she walked down the stairs, her entire living room and dining room was filled with boxes of St. John merchandise.”