ST. JOHN LOSES $3.9M IN QUARTER

Byline: Thomas J. Ryan

NEW YORK — Buried by $8.9 million in after-tax charges related to its buyout, St. John Knits International Inc. reported a loss of $3.9 million in its third quarter ended Aug. 1.
Excluding the charges, earnings slumped 31.7 percent to $5 million, or 35 cents a share, from $7.3 million, or 43 cents, a year ago, primarily reflecting higher debt costs as a result of the buyout. The charges primarily related to acceleration of stock options as a result of the buyout, which was completed in July.
St. John said earnings before interest, taxes, depreciation and amortization (EBITDA) were essentially flat at $15 million.
The firm, however, noted that its performance continued to improve compared with the fiscal 1998 fourth quarter and fiscal 1999 first quarter, when the company was hurt by certain manufacturing inefficiencies and heavy overtime costs, primarily due to quality-control issues.
But it said it does not expect to meet the projections for fiscal 1999 disclosed in its May proxy statement regarding the buyout offer.
St. John had projected EBITDA of $71.6 million in its fiscal year ended Nov. 1 on sales of $314.2 million.
The founding Gray family made the move to essentially go private in order to slow sales and avoid Wall Street pressure for growth. The Grays and venture capital firm Vestar Capital offered $30 a share, or about $520 million, for most of the company’s shares they don’t already own. About 7 percent remains in public hands.
Sales in the quarter nudged up 3.8 percent to $70.3 million from $67.7 million. St John said sales were hampered by the discontinuance of the SJK bridge line last year and the closure of three home furnishing stores and the transfer of a fourth home furnishing store to a former joint-venture partner during the most recent second quarter.
Sales at its retail division climbed 17 percent to $19.5 million, with same-store sales at its full-price boutiques ahead 6 percent.
Gross margins declined to 56.5 percent from 58.2 percent.
Roger Rupert, senior vice president of finance and chief financial officer, said the firm slightly underperformed EBITDA projections in the quarter because of a shortfall in sales and margins. He said sales missed plan by about $1.9 million because of a more conservative reorder stance.
“Bob Gray [chairman and chief executive officer] decided that the line at retail was doing so well that he did not want to ship more merchandise to take the chance that the product out there would be marked down,” Rupert said.
Rupert also said gross margins missed plan by about 70 basis points primarily due to changes in product mix.
Rupert admitted that the firm may have pushed to reach its sales goals in the past, but noted that the pressure of constant growth was the primary reason the firm decided to go private.
“Bob Gray wanted to get out of his public marketplace mentality where you try to hit sales goals no matter what,” Rupert said. “Sales were a little bit short, but in the long run it will help keep profits in line.”
Rupert noted that the firm’s current backlog is “slightly ahead” of prior year levels, while its spring 2000 cruise line was “strong.” He also noted that although gross margins were down against year-ago levels, they improved from the 53.9 percent level seen in the first quarter.
In the nine months, earnings slid 61.1 percent to $10.2 million, or 63 cents a share, from $26.3 million, or $1.53, a year ago, including the charge. Excluding the buyout charge, earnings were down 27.4 percent to $19.1 million, or 98 cents. EBIDTA fell to $47.3 million from $52 million. Sales gained 7.6 percent to $221.9 million from $206.3 million.

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