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12/3/96

12/12/96

12/23/96

1/1/97

1/10/97

1/21/97

1/30/97

2/10/97

2/19/97

2/28/97

3/11/97

3/20/97

3/31/97
Source: Datastream International.
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Case: Donna Karan International Inc.




203
Part 4 Additional Cases




EXHIBIT 5
Financial Data for Fashion Companies

Tommy
Donna Karan International Gucci Hil¬ger Ann Taylor
........................................ ................. ................. ................
YE 1-31-96 YE 3-31-96 YE 2-3-96
YE 12-31-95 YE 12-31-96
..................................................................................................................................................




Donna Karan International
Sales (in thousands) $510,126 $612,840 $500,064 $478,131 $731,142
Cost of Sales (in thousands) $330,689 $412,064 $170,660 $258,419 $425,225
Gross Pro¬t (in thousands) $179,437 $200,776 $329,404 $219,712 $305,917
Operating Income (in thousands) $42,531 $13,302 $120,125 $87,442 $34,781
Net Income (in thousands) $53,675 $25,036 $81,392 $61,500 ($876)

Return on Equity:
Pro¬t Before Taxes/Sales (%) 8.33 2.17 24.02 18.2 4.75
— Sales/Average Assets 2.82 2.37 1.83 1.59 1.14
— Average Assets/Average Equity 2.80 1.81 10.54 1.17 1.95
— (1 ’ Avg. Tax Rate) N/Aa
.96 .72 .67 N/A
= ROE (%) 63.14 9.3 333.57 22.68 10.55
— (1 ’ Dividend Payout Ratio)b 1.00 1.00 1.00 1.00 1.00
= Sustainable Growth Rate (%) 63.14 9.3 333.57 22.68 10.55

Margins:
Gross Pro¬t/Sales (%) 35 32.7 65.8 45.9 41.8
SG&A/Sales (%) 26 30.5 41.8 27.6 37.08
Interest Income(Expense)/Sales (%) “1.49 “1.16 2.14 .15 2.8
Inventory Turnover 3.86 4.09 2.35 3.17 4.14
Collection Period (Days)c 44.52 44.13 18.77 52.25 35.14
Accts. Payable Period (Days) 59.41 65.01 145.9 13.35 36.83

Price Per Share (as of 3/31/97) N/A $9.62 $72.12 $49.25 $20.37
Shares Outstanding (000) (3/31/97) N/A 21.470 60.899 36.880 25.483
P/E Ratio (as of 3/31/97) N/A 7.46 27.44 24.08 56.59
..................................................................................................................................................

a. Tax rate for Donna Karan International 1996 is excluded from calculation due to the firm™s change in status during the fiscal year from a private
to public entity, which resulted in a one-time, non-recurring tax benefit, that when included, distorts ROE.
b. No dividends were paid by Donna Karan International each year, excepting distributions to pre-IPO partners both years.
c. Assumes 365 days.
934 Case: Donna Karan International Inc.




204 Part 4 Additional Cases




EXHIBIT 6
Donna Karan International, 1996 Abridged Annual Report

TO OUR STOCKHOLDERS:

1996 was an exciting and challenging year for Donna Karan International Inc. In a lit-
tle over 10 years, we have grown from offering a women's collection based on the origi-
nal concept of “seven easy pieces” to creating one of the world's leading international
Donna Karan International




fashion design houses. Today, we offer clothing, accessories, and shoes for men and
women under the Donna Karan New York® and DKNY® brands, as well as beauty prod-
ucts under the Donna Karan New York® and DK Men„ brands. Our growth has resulted
from the dedication of our employees, vendors, retailers, and customers and our drive to
develop innovative, high quality products that meet the lifestyle needs of today's consum-
ers. In 1996, we continued to build and expand our brands by segmenting the Donna
Karan New York® and DKNY® women's apparel collections, growing our international
business, and further expanding on our success in the men's apparel business. Other
highlights of the year included our initial public offering, the opening of our ¬‚agship
Donna Karan New York® Collection store in London, and Donna Karan's selection as
Womenswear Designer of the Year by the Council of Fashion Designers of America.
With growth, however, often come challenges. While we were pleased with our sales
growth and increased brand recognition, our 1996 earnings were unacceptable. Signi¬-
cant cost overruns negatively impacted our ¬nancial performance. In this letter, we will
review our accomplishments, discuss our challenges, and then outline our plans for build-
ing long-term value for our stockholders, customers, vendors, retailers, and employees.

1996 Highlights

The year was marked by the following achievements:
Strong Divisional Sales Performance”Most of our divisions produced strong sales
growth in 1996. In particular, the DKNY® women's collections and Donna Karan New
York® men's collections produced double-digit sales growth. Total net revenues in 1996
grew 20.1% to $612.8 million from $510.1 million in 1995. The enduring strength of
our Company and global appeal of our products is evidenced by the continued sales
growth that we experienced in 1996.
Segmentation of Women's Apparel Collections”To clarify our product offerings,
emphasize the breadth of our collections, and target more focused customer categories
at speci¬c price ranges, we segmented our existing Donna Karan New York® and
DKNY® women's apparel collections. The Donna Karan New York® collection was seg-
mented into the Collection (”black label”) and Signature (”gold label”) lines, while the
DKNY® collection was segmented into ¬ve separate labels: D, DKNY®, DKNY® Classic,
DKNY® Jeans, and DKNY® Active. The products currently offered under these DKNY®
labels previously had been included in the Company's existing collection, but are now
more clearly de¬ned for the consumer. Each new label re¬‚ects a unique and individual
design approach and addresses the ever-changing lifestyles of our customers at appro-
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Case: Donna Karan International Inc.




205
Part 4 Additional Cases




priate price points. The retailers' and consumers' positive response to these segmented
collections reinforce our belief that these initiatives provide important avenues of
growth.
Growth of Men's Business”The Donna Karen New York® and DKNY® collections for
men experienced continued impressive growth in 1996. Sales grew by 27.3% and
83.6%, respectively. We believe that the men's divisions will continue to add substantial
sales and pro¬ts to the overall business.
Growth in International Business”Our International Division is one of our most




Donna Karan International
important long-term growth vehicles. In 1996, international sales increased by 32.5%
and represented 37.3% of net sales (excluding sales from outlet stores and licensing),
with signi¬cant growth coming from European, Asian (excluding Japan), and other
markets, including Australia and South America. Product sales are through our licensed
free-standing stores and select retail distribution channels. As our licensees open addi-
tional free-standing stores and we continue to expand the international retail sales net-
work, we expect international markets to present signi¬cant growth opportunities for
our products.
Initial Public Offering”In July, we completed our initial public offering and became
listed on the New York Stock Exchange. By better capitalizing our Company, we posi-
tioned ourselves to take advantage of our growth opportunities.

1996 Challenges

While we are pleased with these accomplishments, 1996 was also marked by signi¬-
cant challenges and setbacks. Despite our growth in net sales, our 1996 operating and
net income declined signi¬cantly from 1995 levels, due in part to the following three
items which impact our 1996 results:
Termination of the DKNY® Jeans License”In September 1996, we entered into a
DKNY® jeanswear license with Designer Holdings, Ltd. In March 1997, the jeanswear
license was terminated by mutual consent, due primarily to differences with respect to
the scope of the product line included in the license. It was of paramount importance to
the Company that the focused product range de¬ned by the jeanswear license not be
increased to impact our core DKNY® business. In connection with this termination, we
recognized $3.2 million of expense in the fourth quarter of 1996 as a result of the pur-
chase from Designer Holdings of sales and marketing plans, samples, patterns, and
other materials developed for the jeanswear license. We are now committed to continu-
ing to grow and expand the DKNY® Jeans business in house, and will utilize the materi-
als developed by Designer Holdings to further these efforts.
Fall 1996 Advertising Campaign”We incurred approximately $5.0 million of
advertising expenses in excess of our budget in funding the Fall 1996 advertising cam-
paign featuring Bruce Willis and Demi Moore. This critically acclaimed campaign,
which received wide exposure, was a unique opportunity for us to increase the focus on
the Donna Karan New York® men's and women's apparel collections and our DKNY®
products. At approximately the same time as we launched the campaign, we had
936 Case: Donna Karan International Inc.




206 Part 4 Additional Cases




anticipated that the Company would recognize a signi¬cant gain from entering into the
DKNY® jeanswear license.
Dif¬culties in Beauty Business”Despite an increase in net sales of 46.4% in 1996,
the Beauty Division's sales were below our internal expectations, which impacted oper-
ating results. As previously announced, we have revised our long-term strategy for the
beauty business. We believe that we have built a tremendous asset, but one which
requires a substantial capital commitment to realize its full potential. As a result, we
have begun to explore the possible license, joint venture, or sales of the beauty busi-
Donna Karan International




ness. We are dedicated to ¬nding a strategic partner whose vision for The Donna
Karan Beauty Company is consistent with our own strategy and which will maximize the
potential of both our Donna Karan New York® and DKNY® brands.
In addition to these items, our pro¬tability was impacted by generally high corporate
and administrative expenses and increased investments in our newly segmented and
existing businesses. We created a Retail Development Division to enhance our competitive
position at retail. We also strengthened our core apparel businesses and our international
franchise by increasing our sales force and our co-op advertising contributions.
As a result of these items, pro forma selling, general, and administrative expenses
increased to 29.1% of net sales in 1996 from 25.7% in 1995 and pro forma operating
income decreased to $20.1 million in 1996 from $30.1 million in 1995. Pro forma net
income declined to $12.6 million in 1996, or $0.59 cents per share, from $18.4 million
in 1995, or $0.86 cents per share, in 1995.

Conclusion

1996's ¬nancial results were unacceptable. We are identifying and implementing
changes that are necessary to curtail the rise in selling, general, and administrative
expenses, improve gross margins, and continue growth without sacri¬cing the quality,
consistency, and image of the Donna Karan New York® and DKNY® brands. Steps being
planned or already implemented include the following:
Control Costs”While our sales growth has been strong, our dif¬culty in controlling
the increase in our expenses in 1996 contributed to disappointing ¬nancial perfor-
mance. To improve these results, senior management is conducting a thorough review
of our businesses and is seeking to curtail or eliminate those areas which have placed a
drain on our pro¬tability. The primary responsibilities of our Senior Executive Vice Pres-
ident and Chief Administrative Of¬cer are to oversee the Company's strategic planning
efforts and to implement our cost control initiatives.
Prioritize Attractive Opportunities”The overall strength and worldwide popularity of
our brands provide us with an enviable set of growth opportunities. However, we face
both organizational and capital constraints that require us to limit ourselves to those
areas which offer the highest return and which will result in increased shareholder
value. The ¬rst step in our goal to better prioritize our efforts has been our initiative to
sell, license, or joint venture the Beauty Division. We will continue to analyze alterna-
tives for our existing and new businesses which may include joint ventures, strategic
alliances, or licenses.
937
Case: Donna Karan International Inc.




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