Donna Karan Donna Karan International Inc.International Inc.

Oberlin Business Scholars 2005Oberlin Business Scholars 2005Group OneGroup One

Fadil Bayyari, Edo Bedzra, Zachary Lewis, Ishaan Fadil Bayyari, Edo Bedzra, Zachary Lewis, Ishaan Pohoomul, Abigail WolfPohoomul, Abigail Wolf

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

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

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

• • In 1996, the company launched an IPO. On June 28, 1996, DKI’s offering of 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 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 share (17% over the initial asking price of $24), raising a total of $258 million.million.

• • There had been several recent fashion IPO's, including the Italian design 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 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, casual apparel, Tommy Hilfiger; and an upscale women’s apparel retailer, Ann Taylor. Ann Taylor.

DKI Product CategoriesDKI Product Categories 1995 Revenues1995 Revenues 1996 Revenues1996 Revenues

Donna Karan New York Collection Donna Karan New York Collection (Men and Women)(Men and Women) $117 million $117 million $123 million$123 million

DKNY DKNY (Men and Women) (Men and Women) $308 million $308 million $378 million $378 million

Beauty Products Beauty Products $30 million $30 million $44 million $44 million

Outlet Stores and Licensing Outlet Stores and Licensing $55 million $55 million $68 million $68 million

Donna Karan Donna Karan International International

YE 12/31/1995YE 12/31/1995

Gucci Gucci

YE 1/31/1996YE 1/31/1996

Tommy Tommy HilfigerHilfiger

YE 3/31/1996YE 3/31/1996

Ann TaylorAnn Taylor

YE 2/3/1996YE 2/3/1996

Sales Sales (in thousands)(in thousands) $510,126$510,126 $500,064$500,064 $478,131$478,131 $731,142$731,142

Net Income Net Income (in thousands)(in thousands) $53,675$53,675 $81,392$81,392 $61,500$61,500 ($876)($876)

ROE ROE (%)(%) 63.1463.14 333.57333.57 22.6822.68 10.5510.55

YET…

Donna Karan International

Gucci Tommy Hilfiger Ann Taylor

Offer Price at Issue $24 $22 $15 $26

Price Per Share (as of 3/31/1997) $9.62 $72.12 $49.25 $20.37

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

DKI Stock V/S S & P 500DKI Stock V/S S & P 500

WHY?WHY?

LOW INVESTOR CONFIDENCE!LOW INVESTOR CONFIDENCE!

WHY?WHY?

• • Sustainable GrowthSustainable Growth • • Missing the NumbersMissing the Numbers• • VolatileVolatile Fashion IndustryFashion Industry• • Dependence on Donna KaranDependence on Donna Karan• • Licensing AgreementsLicensing Agreements

Problem: Sustainable GrowthProblem: Sustainable Growth

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

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

Branches that caused diminishing Investor ConfidenceBranches that caused diminishing Investor Confidence

▪▪ “ “Donna Karan New York Collection” (BlackDonna Karan New York Collection” (Black

Label):Label): • • Women’s: The collection sprang from Karan’s original Women’s: The collection sprang from Karan’s original

‘seven easy pieces’ and was introduced each spring and ‘seven easy pieces’ and was introduced each spring and

fall at fashion shows.fall at fashion shows.

▪▪ Various Accessories:Various Accessories: • • Including jewelry, leather goods, and scarves.Including jewelry, leather goods, and scarves.

Women’s (Black Label)Women’s (Black Label)

Donna Karan New York Collection Donna Karan New York Collection Women’s (Black Label)Women’s (Black Label)• Limited product liquidity and did not Limited product liquidity and did not

appeal to the general public.appeal to the general public.• Donna Karan New York Signature (Gold Donna Karan New York Signature (Gold

Label) preferred to Donna Karan New Label) preferred to Donna Karan New York Collection.York Collection.

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

Various AccessoriesVarious Accessories

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

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

Therefore very risky!Therefore very risky!

Summing UpSumming Up

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

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

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

Problem: Missing the NumbersProblem: Missing the Numbers

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

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

Soon after the IPO…Soon after the IPO…

Oct 29 '96Oct 29 '96• the share price had fallen to $15.5 from its initial asking the share price had fallen to $15.5 from its initial asking

price of $24.price of $24.

• Karan's competitors:Karan's competitors: Their shares had not declined due to their ability to Their shares had not declined due to their ability to

maintain investor confidence.maintain investor confidence. Investors found confidence in Gucci's product line Investors found confidence in Gucci's product line

which consists 20% of apparels and over 50 % which consists 20% of apparels and over 50 % leather goods and timepieces, which were not leather goods and timepieces, which were not volatile.volatile.

Problem: Volatile Fashion IndustryProblem: Volatile Fashion Industry

▪▪ Unpredictable consumer/fashion trends.Unpredictable consumer/fashion trends.

Consumption consistent with Income.Consumption consistent with Income.

Low barrier to entry.Low barrier to entry.

Problem: Dependence on Donna Problem: Dependence on Donna KaranKaran

▪▪ Positions: CEO, Board Chairman, Chief Designer.

▪▪ Contract: Terms of employment.

▪▪ Conflict of personal engagements.

▪▪ Failed IPO due to disagreements with Takihyo Group.

Problem: Licensing AgreementsProblem: Licensing Agreements

Gabrielle Studio, Inc. Gabrielle Studio, Inc. - Conflict of interest.- Conflict of interest.

Brand dilution.Brand dilution.

Incurred Losses: Designer Holdings.Incurred Losses: Designer Holdings.

Tommy Hilfiger has THL Inc., a subsidiary.Tommy Hilfiger has THL Inc., a subsidiary.

Contractual agreements between THC & Contractual agreements between THC & licensees.licensees.

SolutionsSolutions

••Change in ManagementChange in Management

••Simplify and Refocus Clothing LinesSimplify and Refocus Clothing Lines

••Create More Effective Advertisement andCreate More Effective Advertisement andFollow Clothing Trends Through LocalFollow Clothing Trends Through Local

ResearchResearch

Change in ManagementChange in Management

Karan should remain chief designer, but more Karan should remain chief designer, but more business experienced people should take over business experienced people should take over positions of CEO and Chairman of the Board.positions of CEO and Chairman of the Board.• Better earnings predictions – obtainable quoted Better earnings predictions – obtainable quoted

estimates.estimates.

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

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

Simplify and Refocus Clothing LinesSimplify 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 ResearchLocal Research

Create locally based research groups.Create locally based research groups.

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

• Better fit advertisement to local feel.Better fit advertisement to local feel.

Conclusion for Conclusion for Donna Karan International, Inc.Donna Karan International, Inc.

Successful private company.Successful private company.

Stock Price falls despite positive earnings.Stock Price falls despite positive earnings.

Investor Confidence is KingInvestor Confidence is King

““There is a tremendous number of talented people at There is a tremendous number of talented people at Donna Karan. What they are great at is creating Donna Karan. What they are great at is creating brands and great clothing and selling. But running a brands and great clothing and selling. But running a cosmetics business doesn’t draw on their strengths.” cosmetics business doesn’t draw on their strengths.” (analyst F. Landes)(analyst F. Landes)

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

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

Solutions for stock price successSolutions for stock price success

Obtainable earnings estimates from more Obtainable earnings estimates from more experienced business managersexperienced business managers

Participation in markets that offer sustainable growth Participation in markets that offer sustainable growth and directionand direction

Mitigation of fashion industry risks through Mitigation of fashion industry risks through seasonless clothing lines, top-notch designers, and seasonless clothing lines, top-notch designers, and local researchlocal research

Dispersion of the company’s dependence on key Dispersion of the company’s dependence on key personnelpersonnel

Entrance into better licensing agreements by aligning Entrance into better licensing agreements by aligning Donna Karan’s incentives with her shareholdersDonna Karan’s incentives with her shareholders

The EndThe End