QUARTER NET GAINS 10% FOR ST. JOHN
Byline: Catherine Curan
NEW YORK — St. John Knits Inc.’s second-quarter profits rose 10 percent to $9.7 million, or 57 cents a share, in line with the company’s revised forecast issued May 28.
As noted, Bob Gray, chairman and chief executive officer, said May 28 that profits were likely to fall short of Wall Street estimates of about 67 cents.
Gray blamed fewer-than-expected shipments, labor inefficiencies and below-plan leveraging of production overhead.
On May 29 shares of St. John dropped 5 points after the firm said it wouldn’t meet Wall Street’s expectations. On Tuesday the stock closed at 38 11/16, down 1/4, on the New York Stock Exchange.
In a statement Tuesday, Gray said the production difficulties have been addressed, and demand for the St. John brand remains strong. Gray also told analysts that growth of 20 percent in earnings per share is achievable.
In the year-ago second quarter, St. John earned $8.9 million, or 52 cents.
In the quarter ended May 3, sales rose 17.2 percent to $69.8 million from $59.6 million. Same-store sales at company-operated boutiques rose 13 percent, with overall retail sales up 15 percent to $18.5 million. However, gross margin slipped to 58.6 percent of sales from 60.2 percent.
“The shortfall in sales had little to do with demand for the product,” said analyst Jennifer Black, Black & Co., Portland, Ore. “This is a very focused company, and they know where they’re going. They’ve had growing pains, and they’re still a small company,” she said, but added that the quality is exceptional and the business fundamentals are sound. Black expects St. John to have an “excellent” third quarter and good fourth quarter, with earnings rising to $2.39 per share for the year from $2.01.
The company told analysts on a conference call that the lower-than-expected earnings were mainly because of quality issues, which led to reworking of the products, which in turn slowed production. Training and new hiring costs, combined with reworking costs, were the main reasons gross margin missed plan by about 1 percent.
Gray said the company has addressed these issues through efforts such as purchasing more machines and hiring an additional 351 production people, as well as creating a new position, quality director. Roger Ruppert, chief financial officer, said the quality issues are behind the company, but the need for new employees will be an ongoing issue as the firm grows, because St. John prefers to add staff as needed rather than based on anticipated growth levels.
Gray said some gross margin erosion continues as new employees get up to speed, and St. John plans to try to make its staff efficient enough to “maintain current gross margin levels.”
Karla Guyer, senior vice president of marketing, said retail sell-throughs were ahead 10 percent but did not meet the planned increase of 12 to 14 percent mainly because the stores did not get enough merchandise, and amajor chain missed its sales plan.
In the six months, earnings rose 17 percent to $18.9 million, or $1.11 a share, from $16.3 million, or 95 cents. Sales climbed 20 percent to $138.6 million from $115.7 million. Following on the success of its retail operations, St. John plans to expand its retail base. A Las Vegas boutique was relocated in May to a new 5,500-square-foot space, and its ninth outlet store will open in July in an outlet mall near Las Vegas.
In the most recent quarter, St. John and Amen Wardy Home, an associate operation, entered into separate lease agreements for a new retail boutique and Amen Wardy Home store in Scottsdale, Ariz., slated to open in the fourth quarter.
In addition, St. John has entered into a pact with South Coast Plaza to relocate its existing boutique and open a mega-store on the 15,000 square-foot-space that has been occupied by Barneys New York. Slated to open before the 1998 holiday season, the store will house all St. John lines and an Amen Wardy Home store. St. John said these initiatives will add about 28,000 square feet of retail selling space.
Gray said that currently, about 3 percent of the merchandise in Amen Wardy stores is produced by St. John, but that figure is expected to rise to 25 percent in a year. Gray noted the company expects the Amen Wardy operation to break even or perhaps turn a profit in the current quarter.
St. John officials said the South Coast store is expected to have volume of about $10 million in its first year. The New York store currently does about $15 million and is pushing for the $20 million mark, and that volume range is expected for the mega-stores. In other developments, the White Camellia fragrance had a successful launch and is now in 160 doors, with a target of 350 doors — the same number as the signature fragrance. Timepieces were shown at the JCK jewelry trade show last year and have gotten a strong response from retailers, said David Frankel, executive vice president, adding that the Swiss-made watches will make their debut at retail in mid-October.