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pany. Karan was under an employment contract to Donna Karan International Inc. but
could terminate employment without notice based on “good reason.” The company also
employed a design staff of 124, for 10 design teams, each led by a head designer who
shared the responsibility for the creation of the collections. In order to replenish talent,
Karan regularly searched for quali¬ed independent designers.
Advertising and Marketing. These efforts were the most critical component of the
sustenance of the business and were centralized and coordinated from New York in order
to promote a consistent company and product image worldwide. Expenditures totaled
Donna Karan International




$53.2 million in 1996 (excluding expenditures by product licensees). Advertisements
took form in print, catalogs, outdoor advertising media, and in-store display videos. To
control placement and production costs, ensure image uniformity and integrity, assist
company divisions with advertising, and help produce fashion shows and presentations,
the ¬rm coordinated advertising through its Creative Services Department. Karan her-
self was a key marketing asset due to her international celebrity status.

COMPETITORS. The company believed it competed on fashion, quality, and service.
In the designer market the company considered Calvin Klein, Versace, and Prada among
its competitors. In bridgewear, DKNY brands competed with Calvin Klein (CK), Ralph
Lauren (Polo), Guess, Tommy Hil¬ger, and Anne Klein II. The beauty division compet-
ed with the top selling department store beauty product brands such as Estee Lauder, as
well as with other designer offerings like those from Chanel, Issey Miyake, and Calvin
Klein. No one competitor produced a substantial portion of total industry sales.


Growth Strategy
The company™s growth strategy focused on continuing to exploit its brand name and im-
age by growing current product offerings and strengthening its domestic and internation-
al presences by increasing its number of doors, creating more freestanding retail stores,
continuing product segmentation and expansion, broadening its customer base, and ex-
panding licensing efforts.
• Increasing number of doors. The company would concentrate on growing the num-
ber of domestic and international doors by which its products were offered. Specif-
ically, the number of domestic doors carrying new products, men™s apparel, and
beauty products would be increased.
• Creating more freestanding retail stores. The company planned to open domestic
freestanding retail stores in selected locations through licensing, franchises, and
joint ventures. In 1997 the company expected to open seventeen freestanding inter-
national retail stores.
• Ongoing product segmentation and expansion. The company would continue to
create and introduce new and segmented products and was slated to expand several
existing collections, create new divisions, and introduce new beauty products. This
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Case: Donna Karan International Inc.




195
Part 4 Additional Cases




strategy allowed the company to provide a wider range of products to satisfy the
“head-to-toe” Donna Karan lifestyle philosophy.
• Broadening customer base. Through segmentation and the introduction of lower
priced luxury accessory and beauty products, the company would try to appeal to a
larger customer base.
• Expanding licensing efforts. Donna Karan International expected to grant new
product licenses to select manufacturers. These new licenses might be for jeans-
wear and related accessories, swimwear, DKNY underwear, watches, and home fur-




Donna Karan International
nishings.


THE IPO AND FIRST YEAR PUBLIC
In November 1993, Karan attempted to take her company to the public equity markets
in a highly publicized IPO. The offering was scrapped at the last minute reportedly due
to poor earnings, weak new issue markets, concerns over inaccurate valuation of the
¬rm™s long-term growth potential, and disagreements between Karan and her ¬nancial
partners, the Takihyo Group.

RECENT “FASHION” IPOS. Several fashion issues had performed well in recent mar-
kets. The incumbents included Gucci, the Italian design house and luxury goods maker,
and Tommy Hil¬ger, a designer of men™s casual apparel. Other ¬rms, such as the upscale
women™s apparel retailer Ann Taylor, had had a rougher market ride. Exhibits 4 and 5
show these ¬rms™ stock and ¬nancial data.
Gucci, with its highly recognizable logo and strong luxury brand (that together
spurred a cornucopia of counterfeit products), went public in October 1995 at $22 a
share. Gucci produced a limited product line of high quality, high priced luxury products
distributed almost exclusively through company stores. Ready-to-wear apparel consti-
tuted 20 percent of Gucci™s sales, but over 50 percent of sales were for leather products
and timepieces. Gucci had nearly 70 stores worldwide with sales spread equally over Eu-
rope, the U.S., and Asia. The company planned to increase its department store presence.
Tommy Hil¬ger was the second largest line of men™s casual bridgewear and was car-
ried by 1200 retailers. Hil¬ger™s diverse clientele ran from upscale designer focused cus-
tomers to inner-city teens who had adopted Hil¬ger apparel as “streetwear.” The
company™s management team was considered very strong, with over 100 combined
years of apparel industry experience, and included a partner who was a major garment
factory operator in Asia, where Hil¬ger™s manufacturing base was located. Apparel of-
ferings fell into one of three lines: a line of basic seasonless apparel, a widely distributed
seasonal and varied core line, and an exclusively distributed fashion collection. The
company also branched out to other businesses, licensing out what it did not have the in-
house expertise for, including a popular cologne, swim and boys wear, and plans to open
its own retail stores. Hil¬ger™s September 1992 IPO was priced at $15 a share.
926 Case: Donna Karan International Inc.




196 Part 4 Additional Cases




Ann Taylor, a high-end specialty women™s apparel retailer, had traditionally catered,
through stores across the U.S. and in better malls, to a very speci¬c clientele: the higher-
income professional woman. Each store carried standard offerings of classic, ¬nely tai-
lored, conservative, private label (nearly 90 percent of Taylor merchandise) or non-de-
signer brand apparel priced right below designer offerings. The ¬rm did little traditional
advertising, relying mostly on selective catalog distribution, word of mouth, optimal store
locations, and limited magazine advertisements. Ann Taylor considered better retailers
(such as Saks Fifth Avenue) competitors and often operated more than one store in an area.
Donna Karan International




In the 1990s Ann Taylor saw a succession of turnovers in top management driving a
series of changes in strategy, but with an emphasis on growth. In order to support expan-
sion, the ¬rm decided to go to the public markets. Ann Taylor™s May 1991 IPO of $26
per share had fallen in value to $13.12 by November. The loss in value was attributed to
a lack of direction and unsustainable expansion plans, manifest through noticeable de-
clines in quality; a shift away from the traditional timeless style Ann Taylor had built its
reputation on towards trendier, shorter-lived offerings; and declining store sales. The
stock regained value in December 1994 when it reached a share price of $38.25, as the
¬rm tried to refocus on quality, re-emphasize core product, and recapture its customer.
The ¬rm, however, also intended to extend into mail order, fragrance, and accessory
stores, but the market again signaled disapproval in January 1996 when the stock nose-
dived to $9.25 a share.

RE-ENTRY. In 1996 Karan again attempted to enter the markets with a Donna Karan
IPO. Industry followers and analysts were jubilant about Karan™s prospects, projecting
growth of 20“25 percent.
Karan™s offering of 10.75 million common shares debuted June 28, 1996, closing at
$28 per share (17 percent over the initial asking price of $24 per share) raising a total of
$258 million. The offering™s proceeds paid off $116 million worth of notes held by Ka-
ran, Weiss, and the Takihyo Group; retired $72 million of other debt; compensated the
company™s president an amount of $5 million for services rendered; and paid a lump sum
of $5 million to Gabrielle Studios for licensing privileges. After the offering Karan and
Weiss owned 25 percent of the shares and the Takihyo Group, 20 percent.

FISCAL YEAR 1996. Despite the great fanfare which accompanied the IPO, only four
months after its much anticipated Wall Street premiere, the company™s stock price fell to
$15.50 on October 29. In the third quarter of 1996, earnings on sales of $173.4 million
had been $13 million, or 61 cents a share, up from 52 cents (on earnings of $11.8 mil-
lion) the previous year. Despite the growth, the ¬rm announced that earnings would drop
four cents in the fourth quarter. The downward revision was blamed on the performance
of the beauty division, which had fallen $5 million short of expected sales, reducing third
quarter earnings per share from 63 to 61 cents. Karan commented on the division:
We believe that the beauty business has been an outstanding success. In the four
years since we started the business, we built tremendous consumer loyalty and re-
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Case: Donna Karan International Inc.




197
Part 4 Additional Cases




ceived numerous industry awards. Most importantly, we have retained our own vi-
sion of the business and have developed it according to our own high standards.9
Stephen Ruzow, Donna Karan International™s president, laid out the division™s future:
The board has instructed us to pursue either a joint venture, sale, or license agree-
ment for the beauty products and we intend to do that immediately. . . . Donna
wanted the right product(s) out there with integrity, and we are proud that we did
that. Unfortunately, we had an aggressive plan for this year that we didn™t meet.




Donna Karan International
Analysts agreed with Ruzow:
There is a tremendous number of talented people at Donna Karan. What they are
great at is creating brands and great clothing and selling. But running a cosmetics
business doesn™t draw on their strengths.10
The beauty division has really dragged down their revenue; and their revenue
growth, on a quarter-to-quarter basis, is also uninspiring.11
The publication of the company™s ¬rst annual report in March 1997 also signaled the
end of the recently entered DKNY Jeans licensing agreement.12 On March 4 the company
terminated its licensing covenant with Designer Holdings Ltd., returned nearly $12 mil-
lion in fees paid, and recognized the expense in the fourth quarter 1996. Karan stock sub-
sequently tumbled to $11.25 per share on March 5. Exhibit 3 follows the ¬rm™s stock
movements. Ruzow, revealing the ¬rm would develop the jeans business in-house,
explained:
We were overly optimistic in thinking we could get this thing to market by Fall
1997. But the bigger issue was that we were very speci¬c about what products we
were going to license. It became evident that what both parties agreed to did not
work for Designer Holdings. We did not want them to have a failure, but at the
same time, we would not do anything that would impact our core businesses.13
Designer Holdings CEO Arnold Simon, who also produced jeanswear for designer
Calvin Klein, retorted:
I have a clear understanding of what the product lines were, but that was confus-
ing to them. I don™t want one T-shirt; I need a line of T-shirts. We don™t mind hav-
ing T-shirts of a different quality or different look, but you need more than one and

.........................................................................................................................
9. “Donna Karan Announces Higher Third Quarter and Nine Month 1996 Revenues,” PR Newswire, Oct. 28, 1996.
10. Ibid. (quote from analyst F. Landes).
11. Analyst Manish Shah from J. Westhoven, “Donna Karan Gets Discounted,” Reuters, October 29, 1996.

12. The ¬rm™s licensing agreement still totaled six, as in its annual report, because of a new agreement entered to pro-
duce towels in Asia.
13. Jennifer Steinhauer, “Dispute Ends Donna Karan Jeans License,” The New York Times, March 6, 1997, p. 4.
928 Case: Donna Karan International Inc.




198 Part 4 Additional Cases




they should have thought that over.14 . . . Calvin Klein is a very professional com-
pany. They know how to do this. They™ve been doing it for years. Donna Karan
hasn™t dealt with licensees before.15
The returned licensing fees impacted 1996 earnings, which were characterized in the
annual report as “unnacceptable.” The report re-emphasized the company™s commitment
to search for either a suitable partner or an acquisitor for its beauty business, and
acknowledged the need to control its increasing expenses. In order to improve ¬nancial
Donna Karan International




results and respond to its current challenges, the ¬rm proposed in its Letter to Sharehold-
ers to:
• Cut costs and eliminate unprofitable activities after reviewing its portfolio of busi-
nesses.
• Focus on profitability by growing only the businesses that offered the highest re-
turns.
• Strategically view each division as separate, realizing each business unit required
different solutions.
• Invest in building and strengthening its management team and Board of Directors
in order to better take advantage of growth opportunities.
But analysts, the markets, and the media had already started to question the com-
pany™s and Karan™s business acumen and interest in maximizing returns and creating
shareholder value:
I think the brand name, from a fundamental standpoint, is great. What™s hurting
them is the execution of their business strategy.16
It™s clear Karan™s interest is in the hemline, not the bottom line.17




.........................................................................................................................
14. Ibid.

15. Lisa Lockwood, “Donna Doesn™t Do It,” WWD, March 6, 1997, p. 1.

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