Byline: Miles Socha / With contributions from Thomas J. Ryan

NEW YORK — At last year’s annual meeting of Donna Karan International, designer Donna Karan confessed to shareholders she lost sleep worrying about the depressed value of the stock and the company’s poor financial performance.
On Thursday, at the firm’s second annual meeting — held at the Fashion Institute of Technology’s auditorium here — one of the 50-odd shareholders in attendance stood up and asked how’s she’s sleeping now.
The question came after half a dozen shareholders repeatedly berated Karan and her husband, Stephan Weiss, for their Gabrielle Studio agreement, in which the two receive royalties on all sales from retail, wholesale and licensed products. In 1997, they received $17.6 million, while the company posted a net loss, after nonrecurring charges, of $81.4 million.
“The truth is I don’t think I’ve ever slept,” said a slightly flustered Karan, who said she feels her responsibility and conscience extend to her “inner family, outer family” and to shareholders.
Urged repeatedly by one shareholder to renegotiate the “outrageous” Gabrielle Studio agreement, John D. Idol, chief executive officer, tersely deflected that advice and vowed that the “focus of the company is to achieve 2 to 3 percent pretax earnings this year, 5 to 6 percent in 1999 and 7 to 8 percent the next year.”
He said those targets are achievable “regardless of the Gabrielle agreement.”
Disclosed in the initial IPO and all subsequent proxy statements, the licensing pact with Gabrielle states that the company annually pays Gabrielle, which owns the trademarks, 1.75 percent of the first $250 million net sales, plus 2.5 percent of the next $500 million, 3 percent of the next $750 million, and 3.5 percent of all net sales for each year in excess of $1.5 billion.
Idol told shareholders that total product sales — including wholesale, retail and licensing — should total $1.5 billion by the year 2000, roughly double what they were last year.
“Increasing shareholder value” was a phrase used repeatedly by Karan and Idol as they reviewed their strategy for the company and made a case for its having a bright future.
Stemming the flood of red ink that marked the end of 1997, the company reported that its first-quarter earnings rose 157 percent to $2.1 million, or 10 cents a diluted share, compared with $806,000, or 4 cents, a year ago.
“It’s about creating a balance between design, wholesale, retail and licensing to increase shareholder value,” Karan said in her opening address.
Karan called 1997 an “extremely challenging year,” and she praised Idol for the progress he’s made in returning the company to profitability since joining the organization last July.
“He has a clear, distinct vision, and he’s willing to take risks to turn things around,” Karan said. “From day one,” she continued, “John observed, listened, learned, identified problems and began working on them to increase shareholder value. John and I are a team. We complement each other well.”
Idol reviewed the key facets of the strategic plan he unveiled to the investment community in December, which is predicated on exploiting the company’s four key brands — Donna Karan New York, DKNY, DKNY Jeans and DKNY Active — and achieving a more balanced revenue stream.
Last year, wholesale operations accounted for 87 percent of revenues, retail operations for 11 percent and licensing for 1.5 percent, he said.
By 2000, Idol expects wholesale operations to decrease to 69 percent of revenues, retail to rise to 25 percent and licensing to increase to 6 percent.
In its wholesale division, Idol stated that the company plans to improve profitability by reducing the number of styles per season by as much as 50 percent in some collections; reducing the number of factories used, and introducing more seasonless garments that are available on a quick-response basis.
Idol highlighted the company’s expanding retail network as a means of increasing brand awareness, “waking up” its wholesale customers and improving the bottom line.
Idol said the company will be ending the current year with 70 licensed freestanding stores and will close the century with 125.
The first company-owned freestanding DKNY store in the U.S. recently opened in Las Vegas.
Idol said three more company-owned DKNY units will bow this year.
He said the plan is to open eight to 10 pilot locations in the U.S. and evaluate them for 18 to 24 months before rolling out more.
Turning to its chain of company-owned outlet stores, Idol said Karan plans to remerchandise them, ending the year with 63 locations, up from 49 in 1997.
He also said the company’s eight new licensing partners — Estee Lauder, Liz Claiborne Inc., Wacoal, Phillips-Van Heusen, Peerless Clothing, Mallory & Church, Fairbrook Enterprises and Esprit de Corp. — would boost brand awareness by doubling Karan’s advertising investment next year.
The media buy totaled about $18 million last year, he noted.
“We believe we have the vehicles for sustained growth,” he concluded.
In a question-and-answer session dominated by two disgruntled shareholders, Idol deflected charges that the company pays its directors too much, spends too much on legal fees and accounting services and uses models that are far too young in its ad campaigns.
When Karan opened on the New York Stock Exchange in June 1996, it was priced at 24. The stock closed Thursday at 14 1/8, down 5/16.
Asked after the meeting to comment on his progress in filling executive vacancies at the company, Idol reported that Ilse Crawford has been named vice president of merchandising and product development for home, which is a new position at the company.
Crawford, who was editor-in-chief of British Elle Decor, assumes responsibilities previously held by Sonja Caproni, who just left the company, as reported.
Karan still needs to find a new president of DKNY Womenswear to succeed Mary Wang, who, as reported, will start Monday as president of Emanuel/Emanuel Ungaro.
In a positive sign, Morgan Stanley Dean Witter, one of Karan’s original underwriters that had stopped coverage of the company in spring 1997, reassumed coverage with an “outperform” rating.
In a report entitled “Should You Invest in an ‘Idol,”‘ Josie Esquivel wrote that while the shares have been disappointing since the IPO, “we believe the new management team and the repositioned brands will result in an accelerated earnings growth of 20 percent off a normalized basis in 1999.”
She said a new focus on specialty retail operations and on licensing should offset near-term declines in Karan’s wholesale business.
Esquivel expects earnings of 30 cents a share this year and $1 in 1999, which compares with a loss of $3.78 after charges in 1997.
“With the missteps of the past few years, Donna Karan is a still a very viable and important designer brand to retailers and consumers worldwide,” Esquivel wrote.

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