By and  on June 3, 1994

NEW YORK -- "Ninety-five percent of the rumors are false, and five percent are lies."

So says Stephan Weiss, co-chief executive of The Donna Karan Co., and the designer's husband.

Weiss was addressing a spate of rumors circulating in the market that the Karan company is in trouble.

In an interview with WWD Thursday, Weiss denied there are problems in the house of Karan. "We have grown at an incredible rate. What we're doing now is trying to solidify our growth and make sure everything sticks."

Rumors about the company's health began last fall, when it put the brakes on an initial public offering. The murmuring hasn't abated since.

Speculation has been fueled by various developments:

  • Late shipments of the spring collection, which led to some bitter store complaints.
    Layoffs of 37 employees last month. While the layoffs accounted for less than 3 percent of the company's workforce, reports persisted that more cutbacks were on the way -- which Weiss denies.
  • The closing of the company's fledgling children's division, which Weiss said Karan may license or turn into a catalog business.
  • Persistent reports that DKNY Men's is a tough sell and that DKNY Women's has peaked.
  • The need for refinancing, possibly through a private placement that trades on equity or debt or a combination of both.
  • Increased friction among partners Tomio Taki and Frank Mori, and Weiss and Karan. Taki and Mori had reportedly wanted to cash out of the business through the $150 million IPO, which, as noted, was postponed indefinitely last November because earnings at the time were "below plan," and the company would not realize its full value in the public market.
  • The dismissal of the company's chief financial officer -- David Golden -- after only one month's tenure, and a subsequent lawsuit filed against Golden on Wednesday by Karan. Among other things, the lawsuit blames Golden for the company's default on its revolving credit line. Golden's attorney, meanwhile, says he's preparing a countersuit.
Weiss dismissed reports of financial problems at the firm: "We had a very good year last year. Our company performed as well as anybody in this business. We made money, and through the beginning of this year, we're showing an improvement over last year."Weiss also denied the company was contemplating layoffs beyond the 37 employees who lost their jobs last month, and he said that a private placement to raise money "is still an option, but we are considering others."

Concerning the DKNY women's business -- which became a powerhouse in a relatively short time, and then saw sales slow down -- Weiss conceded "it has become a mature one" in the U.S. He added: "We have tremendous growth potential internationally. We also have opportunities to grow the DKNY brand (through licensing)."

He said the women's signature collection, which was shipped several weeks late due to fabric problems, "has done extremely well...The late shipments were not idiosyncratic to this company." He said, "The Italian mills were late."

In men's wear, Weiss denied that DKNY men's was in serious trouble. He admitted that the line, which was launched two years ago, had "initial problems," but he said those have been addressed: "The design mix was off, but we strengthened the design team. We're on plan." He noted that the division was still an emerging business "and was not expected to make money yet."

The men's signature collection, established in fall 1991, is more developed and a much larger business, he said. "The men's collection is doing great."

Turning to the beauty company, which Karan owns and operates in-house, Weiss said he expects it to break even in 1995.

Karan's deep investment includes not only the women's fragrance, but a collection of body products, a skin care line and an upcoming men's fragrance in the fall.

"The beauty products are doing incredibly well." He noted that in Harvey Nichols in London "for two consecutive weeks, our six SKUs outperformed Chanel."

"At Bloomingdale's we're number one, and at Nordstrom's, we're number one on the floor," he said.

Some sources say the beauty business has been a drain on the firm's finances and that it might have put less stress on the bottom line had it been licensed to a fragrance expert.

Weiss countered that he would license out any part of the Karan business if it were appropriate, including the beauty business."Look," he said, "if someone comes along with $1 billion to buy this [whole] business, I'm out of here."

"My job in this company and for my wife is to look at all the pieces and components, and if opportunities present themselves...I would license out any piece of the business."

Weiss said there were specific reasons for developing the beauty business in-house, reportedly a sore point with partners Taki and Mori.

"This was not a project that was a personal agenda or challenge. It was the right decision for The Donna Karan Co."

"This was about us having a vision," said Weiss. "Donna had a vision of hosiery. [We were told] there's not a woman on earth who would spend between $15 and $20 on pantyhose, so we went to Italy and found someone to do it for us. Then the president of Hanes said this was an interesting idea, and today it's a $30 million to $40 million business.

"We had a vision for the beauty business. We didn't want the body product to smell like the fragrance."

He said there are no current negotiations to license the beauty business.

The company launched its women's fragrance, Donna Karan New York, in fall 1992 at Bloomingdale's, where it quickly shot into the store's number-one ranking and has remained there into this season through April, according to Michelle Williams, merchandise manager of fragrances and cosmetics accessories at Federated Merchandising.

The Karan line has also climbed the charts at Saks Fifth Avenue. Saks began adding the line to individual branches in spring 1993 and now stocks it in 90 percent of the chain's doors, according to Steve Bock, vice president and divisional merchandise manager. "It's been a very exciting success story," he said, adding that the line generally ranks in the top 10.

Why do the rumors persist?

One retail source, who requested anonymity, said the signature women's collection performs well -- when it is delivered on time -- but spotty deliveries make the business inconsistent. The same is true of the men's collection, the source noted.DKNY, said the retailer, has picked up momentum recently, and the athletic-inspired group and navy schoolgirl looks were strong this spring.

Karan, according to the source, is a world-class designer. Her spring collection was good, while DKNY was better, but the rumored financial problems of the company have distracted Karan from her focus on design.

The source also called the fragrance "a drain" on the company, but noted that it was doing well in certain stores.

According to another major retailer, the Donna Karan business overall has been flat, but DKNY, which runs hot and cold, is doing well this season, especially on items such as military vests. "DKNY shoes are spectacular. They've got great styling and good price points, and all are fashion statements."

"The men's collection is doing well. The styling is very good and so is the quality. But we get a lot of returns on the suits. They sell, but they come back a lot, as does the women's collection.

"Deliveries for the women's collection is a disaster. DKNY is a little better this season. Men's deliveries are OK. Jeans sell well."

Some observers pin some of Karan's problems to expanding too quickly in too many directions.

Weiss noted, "When we started the business we were sitting on a runaway horse. My experience was to pull back the reins."

Asked why the company is the object of so many rumors, Weiss responded: "I would say a lot of those rumors were established during the I.P.O. The genesis of the rumors were seeded in the first article printed about it and it blew the story out of shape, and we, as a company, were not allowed to respond."

Discussing the involvement of his partners, Mori and Taki, in Donna Karan, Weiss said, "They have a huge asset here and they're real involved. There's no involvement in the day-to-day management of this company. As far as the development of business plans, we come to unanimous decisions. Our partnership is constructed in a way that if we do not have a unanimous decision, we don't go forward."Weiss added, "There are no active or passive plans to buy out Mori and Taki." Neither Mori nor Taki were available for comment Thursday.

Meanwhile, the lawsuit against former cfo David Golden, filed by Karan in New York State Supreme Court, seeks to head off charges of breach of employment contract, contending that Golden was fired for cause as permitted under the agreement. Golden is charged with negligence, failure to follow directions, making offensive statements to women employees, abusing staff members and people the company did business with and other inappropriate behavior.

The suit said Golden's principle job initially was to prepare a contingency plan required by Citibank to continue Donna Karan's revolving line of credit in the event a private placement of debt securities could not be completed.

The only statement Weiss would make about the company's lawsuit against Golden was, "It's deeply saddening to me to have to file those papers. It's not my style or my wife's style."

Golden may have file lawsuit of his own in "a relatively short period."

Golden's attorney, Mel P. Barkan of Brauner, Baron, Rosenzweig & Klein, on Thursday denied the charges in the Karan suit but declined to be specific because "the matter is in litigation.

In a telephone interview, the attorney added, "You can be certain we will respond to the charges shortly."

In Karan's suit, the company claims, "The contingency plan prepared by Golden was so incomplete and inaccurate" that it constituted "gross negligence," adding, "the manner in which Golden prepared the contingency plan placed DKC in technical default under the revolver."

Also, Golden failed to submit the contingency plan to Karan's partners prior to giving it to Citibank, the company charges.

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