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Youth Meets Maturity: St. John Seeks Balance in Newest Phase

With the departure of ceo Richard Cohen and the naming of Phil Miller as interim ceo, St. John hopes to put the recent rocky period behind it.

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NEW YORK — Get ready for chapter three at St. John.

With the abrupt departure last month of Richard Cohen, its president and chief executive officer, and the naming of board member Philip Miller as interim ceo, the company hopes to put the past rocky 18 months and recent declines in sell-throughs behind it.

The 44-year-old St. John, which was run for more than four decades by the Gray family, has been the talk of the industry lately as Cohen heads back East, and Miller heads West to stabilize the firm while setting a new strategy focused primarily on product.

During his controversial tenure, Cohen, a former ceo of Zegna North America, initiated a series of sweeping changes in design, pricing, management, image and advertising at the $400 million company in an effort to shore up its lagging profits and attract a younger customer. While some of the changes were undoubtedly necessary to reinvigorate the company — historically a top retail performer — their abruptness and the firings wreaked havoc on the business. Changes in fit, pricing and design led the brand’s loyal, mature customer to wonder whether St. John had abandoned her for a younger woman, and the highly publicized naming of Angelina Jolie as the company’s spokeswoman in a reported $12 million multi-year deal led some observers to question whether the company was grappling with a fundamental identity crisis.

“I don’t think they realized what a gold mine they had with loyal ladies like us,” said Maria Camello, a 45-year-old yacht club owner in San Pedro, Calif., who has been collecting St. John for over 20 years. Camello, who used to spend $50,000 a year at St. John, and this year has spent about $5,000, is upset with the fact that she can no longer fit into the mediums anymore because the company changed the fit. “It is so insulting to go in and have the clothes not fit. Marie Gray [co-founder and former chief designer] never made me feel fat,” said Camello.

Miller acknowledged that perhaps the company moved “too far, too fast,” but feels strongly that St. John should reach out to a younger customer while keeping its core base. Ideally, 90 percent of the business should be generated by core customers, and 10 percent by younger customers, he said.

“Clearly, fashion brands have to evolve,” said Miller, the former chairman and ceo of Saks Fifth Avenue. “[Look at] what Rose Marie Bravo did with Burberry and Reed Krakoff did at Coach. There’s no way we can’t have a similar evolution, not a revolution.”

Now, said Miller, “The first priority that needs to be addressed is product. That’s what we’ve been focused on and talking about exclusively” since he took over as interim ceo.

A hot topic of conversation over the past year was the fact that St. John was searching for a new big-name designer to take over its creative helm. During Cohen’s tenure, Marie Gray relinquished her design responsibilities and she was succeeded by Tim Gardner, effective with the spring 2006 collection. Discussions were held with Narciso Rodriguez, Derek Lam, Behnaz Sarafpour, Proenza Schouler and Vera Wang about becoming creative director of the brand, but none of those negotiations resulted in a deal and they appear to be dead for now. “We’re not looking to bring a designer in,” said Miller. “Tim Gardner is heading up the design team of very competent people who have been there for years.

“Right now we’ve got a design team in place that will finish this year out,” added Miller. Once a new ceo comes in — he expects the search, which is being conducted by executive recruitment firm Berglass Grayson, will take about four to six months — that executive may want to make changes in the design area, he said.

Miller believes Cohen was headed in the right direction with his initiatives, but the product got lost in the shuffle. “In our desire to execute change, we didn’t pay as much attention to the product and its fit,” he said.

Cohen, who resigned for family reasons, couldn’t be reached for comment.

Miller, who commutes each week between St. John’s headquarters in Irvine, Calif., and New York, admitted that with the spring collection, St. John started having “fit issues and quality issues,” which he attributed to using new yarns for its tweeds and a different knitting technique. St. John didn’t realize the difficulties it would have in producing and delivering the styles on time. “They reacted differently; it’s not a universal problem, but it affected certain items,” Miller explained.

The company also tried to attract younger customers with new pattern specs. “It was a more contemporary and slimmer pattern,” said Miller. Because of the slimmer silhouette, he said, “some of our core customers didn’t understand it or couldn’t wear it.” The company missed its sales plan both last fall and this spring.

To help solve design and merchandising problems, the company recently named Lowell Breving, who had been head of St. John stores, as production development head, working with Gardner and Max Weinstein, executive vice president of operations and production. Miller intends to look for a successor to Breving to head up company stores. He said Breving’s responsibilities as chief merchandiser are “a critical role for us. It’s very valuable to make sure that the marketing and design of the product is customer-centric.” The position is a new one, and the firm hasn’t had anybody at that level before in merchandising.

In Miller’s opinion, there are still many growth opportunities for the brand. One of the priorities is to expand its accessories business through licensing arrangements. Except for its successful belt business, the company exited the handbag, footwear and accessories business (which it distributed to its own boutiques) last season because the in-house operation was an insignificant part of the overall operation, and the company felt it wasn’t its core competency. In the future, Miller would like to introduce licensed footwear and accessories collections.

“Accessories open more doors for the younger, more contemporary customer,” said Miller.

Another opportunity is international expansion, since sales outside the U.S. are still relatively small. St. John will open an office in Hong Kong in June to help grow its sales in the region. Ralph Polese, formerly with Gucci’s international division, has been named president of St. John Asia. “We have a good base in Korea, China and Hong Kong,” said Miller. The company has its own store in Hong Kong, as well as a store in Tokyo. There are currently 29 freestanding boutiques and 13 outlet stores in the U.S.

“St. John is a very large, successful apparel business, which does almost $400 million and is very profitable,” said Miller. “It’s the top apparel brand for Saks Fifth Avenue and Neiman Marcus and is successful in its own retail operations. The brand doesn’t have to be remade. It needs to build on the base, and expand the brand to a more contemporary customer.”

He said Vestar Capital Part­ners, the private equity firm that bought a majority stake in St. John in 1999 for $520 million, didn’t buy a business that was broken with the intention to flip it quickly. He pointed out that St. John’s business has grown by $100 million in revenues since Vestar bought the firm in 1999.

Although recent figures aren’t available, the company’s financial picture just a few years ago showed that sales were increasing while profits were eroding. For the fiscal year ended Oct. 31, 2004, St. John had revenues of $395.6 million, up from $370.1 million in 2003 and $362.2 million in 2002. However, net income fell to $13.4 million in 2004 from $14.9 million in 2003 and $24.3 million in 2002.

Operations at St. John weren’t smooth sailing even before Cohen’s arrival. St. John went public in 1993, and quickly became a Wall Street favorite. But after several years of rapid growth, Robert Gray, the company’s co-founder and chairman, decided to take it private in 1998 because he didn’t like the pressure of having to live up to Wall Street’s expectations. After missing analysts’ forecasts for two consecutive quarters, he realized continued growth at that accelerated pace was too difficult and he was compromising the brand’s integrity. He quickly struck a stock buyout deal to take the firm private, selling a majority stake to Vestar in 1999, and retaining a minority interest. The Grays continued to actively run the business, but then in 2001, Bob Gray decided to step down from active management and brought in H.W. Mullins as ceo, who stayed for nine months. Bob Gray then postponed his retirement, and helped train the next set of managers — Kelly Gray and Bruce Fetter — who took over as co-presidents. Their reign ended with the arrival of Cohen, who was given total authority to run the business.

Industry observers said one of Cohen’s problems was that he lacked experience in the women’s market. He also spent a lot of money and moved too quickly to make changes in a company with such an entrenched “family-run” business culture. “Very few people who have been men’s wear specialists have been successful in the women’s market,” said one market observer. The executive believes that Cohen was hired because of his tight relationships with Neiman Marcus, Saks Fifth Avenue and Nordstrom. “He doesn’t have the culture of the women’s business.”

“He killed the goose that laid the golden egg,” said another source. “St. John has an extremely loyal customer, but after the changes he instituted, you couldn’t buy the stuff; he changed the fit, and the specs on the basics, he fired Kelly Gray and then her mother, Marie, quit. He tried to remake the company and put his imprimatur on it, but sell-throughs fell dramatically.”

Several St. John store managers interviewed complained the lines weren’t resonating with the company’s core customers; that Cohen had favored more masculine-cut pants and woven striped fabrics and patterns reminiscent of Zegna; their compensation structures had changed; there was excessive turnover in sales personnel; prices had escalated, but quality had declined; fits were off, and that their key customers were spending a lot less money at the St. John boutiques, causing the stores to miss sales plans.

Over the past 18 months, Miller admitted the firm had some price increases, but said they weren’t in excess of price hikes at European companies. “We changed the markup structure in favor of our wholesale accounts and our own retail stores,” he said. The company also added new fabrics, and the costs of labor and marketing, as well as normal inflation contributed to price increases. Currently, most of the manufacturing is done in Irvine, but St. John hasn’t ruled out moving some of that production.

Some sales associates at the boutiques were angry their commissions were reduced under Cohen. For sales associates, the company added a base guarantee to their commissions, but reduced their commissions, said Miller. Previously, the sales associates didn’t have a base, only a commission. “They’re making more money today than when it was pure commission,” Miller said.

Some boutique managers surveyed were also upset the company eliminated size 16, much to the chagrin of their larger-sized customers, but Miller said the size has been reinstated. Equally disappointing to the boutique’s salespeople was that the company had de-emphasized its use of Santana, the signature knit fabric largely associated with St. John. Miller said it will continue to be an important part of the mix.

Perhaps what created the most waves at the firm was the hiring of Jolie as the company’s spokesmodel last fall, ending Kelly Gray’s 23-year reign as the face of the brand. (For an interim season — fall 2005 — Gisele Bündchen was the company’s model in its ads.) The company also hired Lipman, a New York ad agency, to remake the St. John image. Despite Jolie’s popularity as a tabloid favorite and the initial buzz it brought to the company, customers and marketing experts failed to see the connection.

Miller noted Jolie has a multi­year contract with St. John, and believes it’s a good association. “Angelina Jolie can bring vibrancy to the brand image,” he said. “We’re happy to have her.”

“Having a person and a beautiful modern Angelina Jolie as an announcer of subtle change is a good thing. There are a lot of St. John clothes that she’ll look stunning in,” he added, noting the company already shot its fall campaign with the actress, who’s expecting a baby shortly.

“The St. John line is never going to be Dolce & Gabbana, but it could be a more contemporary St. John,” said Miller, noting change takes time and it won’t be evident overnight. “The product is younger today than a year ago,” he said, adding it will take another year for the changes to truly take effect.

Stores acknowledged the St. John business has been sliding and has veered away from its core customer. Debbie Palazzo, president of Miss Jackson’s in Tulsa, Okla., said, “We’re hopeful they’re going to regroup and get back to their core identity. It was the perfect power suit, and a perfect add-on travel wardrobe for people who have an active lifestyle. What used to be [the price for] a suit is now just the jacket, and you start to see some resistance there. We are hoping they’ll get back to what they’re good at. There really isn’t anything else that fills that niche.”

Ron Frasch, vice chairman and chief merchant at Saks Fifth Avenue, told WWD, “It’s a really important business and one of our largest divisions. It needed to go through a transition. It needed to adjust its focus and needed to become less predictable. It owns a very powerful position in the segment of the marketplace. It needed to tweak its product. It’s in a normal transition.”

Kim Jones, president of Binns in Williamsburg, Va., an upscale women’s clothing store that has sold the brand for some 25 years, said, “St. John needed some change, but the wheel needed to be oiled, it didn’t need to be taken off. That’s what’s happened.”

Over the last season, sales of St. John are down by 15 to 20 percent at Binns. “With all the changes happening at the same time, the change in the face of St. John, the change in the management of St. John, the change in styling, that was just too soon, too much for the retailer as well as the consumer. It was scary for all of us,” said Jones.

“I think that we’re going to see some turning back around to a little bit more toward what was,” she said. “I think that we’re going to see a more positive change in that they’re not going to take it as far.”

With contributions from Marcy Medina and Emili Vesilind, Los Angeles, Holly Haber, Dallas, and Evan Clark, Washington

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