Italian Design House And Luxury Goods Maker, Gucci A Designer Of Men’S And Women’S Casual Apparel, Tommy Hilfiger And An Upscale Women’S Apparel Retailer, Ann Taylor.

Donna Karan International Inc. Oberlin Business Scholars 2005 Group One Fadil Bayyari, Edo Bedzra, Zachary Lewis, Ishaan Pohoomul, Abigail Wolf

Introduction

• Donna Karan International (DKI) Inc., an international fashion design house, was founded in 1984 by its Chairman, CEO and Chief Designer Donna Karan, and her husband and Co-CEO, sculptor Stephen Weiss. The company was owned by Karan, Weiss and their financial backers, the Takihyo Group.

• The company designed, produced, marketed and distributed clothing, footwear and accessories for men and women under the “Donna Karan New York” and “DKNY” brand names.

• It launched a beauty division in 1992, which produced a variety of perfumes, creams, lotions, shampoos and soaps for men and women under the brands “DK Men” and “Donna Karan New York”.

• In 1996, the company launched an IPO. On June 28, 1996, DKI’s offering of 10.75 million common shares debuted, and ended up closing at $28 per share (17% over the initial asking price of $24), raising a total of $258 million.

• There had been several recent fashion IPO's, including the Italian design house and luxury goods maker, Gucci; a designer of men’s and women’s casual apparel, Tommy Hilfiger; and an upscale women’s apparel retailer, Ann Taylor.

YET… $68 million $55 million Outlet Stores and Licensing $44 million $30 million Beauty Products $378 million $308 million DKNY (Men and Women) $123 million $117 million Donna Karan New York Collection (Men and Women) 1996 Revenues 1995 Revenues DKI Product Categories 10.55 22.68 333.57 63.14 ROE (%) ($876) $61,500 $81,392 $53,675 Net Income (in thousands) $731,142 $478,131 $500,064 $510,126 Sales (in thousands) Ann Taylor YE 2/3/1996 Tommy Hilfiger YE 3/31/1996 Gucci YE 1/31/1996 Donna Karan International YE 12/31/1995 $20.37 $49.25 $72.12 $9.62 Price Per Share (as of 3/31/1997) $26 $15 $22 $24 Offer Price at Issue Ann Taylor Tommy Hilfiger Gucci Donna Karan International

DKI Stock V/S Gucci, Tommy Hilfiger, Ann Taylor

DKI Stock V/S S & P 500

WHY?

LOW INVESTOR CONFIDENCE!

WHY?

• Sustainable Growth

• Missing the Numbers

• Volatile Fashion Industry

• Dependence on Donna Karan

• Licensing Agreements

Problem: Sustainable Growth

▪ Parts of Donna Karan’s Inventory did not appeal to the General Public.

▪ A wide variety of goods that increased costs and brought little returns to the volatile apparel industry.

Branches that caused diminishing Investor Confidence

▪ “ Donna Karan New York Collection” (Black

Label):

• Women’s: The collection sprang from Karan’s original ‘seven easy pieces’ and was introduced each spring and

fall at fashion shows.

▪ Various Accessories:

• Including jewelry, leather goods, and scarves.

Women’s (Black Label)

Donna Karan New York Collection Women’s (Black Label)

Limited product liquidity and did not appeal to the general public.

Donna Karan New York Signature (Gold Label) preferred to Donna Karan New York Collection.

Many instances where Donna Karan New York Collection Stores were converted to Signature (Gold Label) stores.

Various Accessories

This line, which included men’s accessories, was shaping itself to become a line not dependent on coordinating with the collections.

A branch which is considerably “additional” to the clothing line and is not cyclical to the sales of apparel.

Therefore very risky!

Summing Up

▪ Having so many different products caused Donna Karan to significantly deviate from her original business model of “seven basic pieces".

▪ Investors took this extreme expansion as a sign that Donna Karan has lost focus on the essential aspects of the business, which would create a decrease in product quality.

▪ Investors became worried that this expansion would cause a decline in product quality, which would lead both earnings and stock price to fall.

Problem: Missing the Numbers

The beauty products division had a higher gross revenue than the apparel division and had grown from $30 mil to 44 mil $ from '95 to '96.

However, it still fell short of the quoted target revenue by $ 5 mil, resulting in a fall in third quarter earnings per share from 63 to 61 cents.

Soon after the IPO…

Oct 29 '96

the share price had fallen to $15.5 from its initial asking price of $24.

Karan's competitors:

Their shares had not declined due to their ability to maintain investor confidence.

Investors found confidence in Gucci's product line which consists 20% of apparels and over 50 % leather goods and timepieces, which were not volatile.

Problem: Volatile Fashion Industry

▪ Unpredictable consumer/fashion trends.

Consumption consistent with Income.

Low barrier to entry.

Problem: Dependence on Donna Karan ▪ Positions: CEO, Board Chairman, Chief Designer. ▪ Contract: Terms of employment. ▪ Conflict of personal engagements. ▪ Failed IPO due to disagreements with Takihyo Group.

Problem: Licensing Agreements

Gabrielle Studio, Inc.

- Conflict of interest.

Brand dilution.

Incurred Losses: Designer Holdings.

Tommy Hilfiger has THL Inc., a subsidiary.

Contractual agreements between THC & licensees.

Solutions • Change in Management • Simplify and Refocus Clothing Lines • Create More Effective Advertisement and Follow Clothing Trends Through Local Research

Change in Management

Karan should remain chief designer, but more business experienced people should take over positions of CEO and Chairman of the Board.

Better earnings predictions – obtainable quoted estimates.

Karan needs to limit engagements to other business activities and focus on her company.

There should be an added focus on retaining top designers with stronger contracts and benefits.

Simplify and Refocus Clothing Lines

Focus only on lines that offer maximum profit, like Donna Karan New York Signature and DKNY.

Cut out inefficient lines like DK Black and the accessory line that included jewelry, leather goods and scarves.

Create a seasonless clothing line.

Reorganize licensing agreement with Donna Karan and Gabrielle Studios.

Local Research

Create locally based research groups.

Get in touch with local trends/culture to better predict fashion and consumer trends.

Better fit advertisement to local feel.

Conclusion for Donna Karan International, Inc.

Successful private company.

Stock Price falls despite positive earnings.

Investor Confidence is King

“ 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.” (analyst F. Landes)

“ The beauty division has really dragged down their revenue…” (analyst Manish Shah)

“ I think the brand name from a fundamental standpoint, is great. What’s hurting them is the execution of their business strategy. It’s clear that Karan’s interest is in the hemline, not the bottom line” (Editor Alan Millstein)

Solutions for stock price success