Byline: Jenny B. Fine

NEW YORK — It has been only 10 days since Donna Karan acknowledged it was ready to loosen its grip on The Donna Karan Beauty Co. and already the rumors are flying.
Speculation reached a crescendo of sorts Thursday afternoon with reports that a deal had actually been struck. But that notion was quickly quashed by Stephan Weiss, Donna Karan’s husband and the company vice chairman who spearheaded development of the beauty business.
“We have had zero talks with anyone,” he said. “We have had numerous phone calls of interest, but we have spoken to nobody.
“There is no rush to judgment here. This is a story of a success,” Weiss added, noting that the company is interested in maximizing what it sees as a great opportunity, “not jump off a cliff.”
Weiss was reluctant to pin himself down, but said, “Our inclination would be toward a capital infusion in the company — a joint venture alliance. We have the management and the backroom strength to run the company and grow it.”
It might be an opportunity, but it’s an expensive one. In its third-quarter financial statement, released last week, Donna Karan said its beauty division, which launched its newest women’s fragrance, Chaos, in October, posted a 74 percent sales increase, but was still $5 million below plan. In addition, Stephen L. Ruzow, president and chief operating officer, said fourth-quarter sales are expected to fall below expectations, and the company expects to post a loss of $900,000 on sales of $20 million for the period.
Fueled by a 49.8 percent growth this year, annual beauty sales are expected to hit at least $45 million wholesale.
All this was enough to crank up the rumor mill. By Thursday, speculation had thickened to the point that Designer Holdings Ltd. — which recently acquired Karan’s jeans license — was said to have bought the beauty company.
“Not a chance,” said Arnold Simon, chairman and chief executive officer of Designer Holdings. “[The beauty business] is not my business. I may be nutty, but I’m not crazy. But I’m sure it’s a great business.”
Interest has also been high on Wall Street, where analysts came up with a list of the usual suspects as possible suitors.
They are betting it will be one of the major cosmetics conglomerates — Estee Lauder, LVMH or L’Oreal, possibly — that will ultimately pick up the Karan beauty license.
Unilever and its Elizabeth Arden division have also been tabbed as possible contenders, although Arden is still reestablishing itself.
Citing successful partnerships — Calvin Klein and Unilever, Tommy Hilfiger and Estee Lauder, Ralph Lauren and Cosmair — analysts said such an alliance could provide the expertise, infrastructure and cash necessary to put the Karan beauty business on the next level.
Leonard Lauder declined comment on reports of his company’s possible involvement, while Peter England, president of Elizabeth Arden, was equally silent, and a spokesman for Cosmair said he knew of no interest being expressed by parent company L’Oreal.
An LVMH spokeswoman in Paris said the company is not in negotiations with Karan.
“Aligning themselves with somebody who is a major power in this business can add positive numbers to Karan’s bottom line as royalty income, and with the right partner, it can add a lot of money to the bottom line,” said Peter Schaeffer, consumer and retail products analyst at Dillon Read. “The success of Hilfiger with Lauder is a great indicator that these types of alliances work.
“Donna Karan would be a good fit for Lauder or LVMH,” he continued. “It is a prestige fragrance and cosmetics line, and it needs to be aligned with one of the major players.”
Schaeffer downplayed the possibility of a Unilever connection, saying, “In terms of Donna Karan’s type of business, I think she would want to have more say than she could probably have at Unilever. An alliance with a purely cosmetics company would enable Karan to be a bigger participant.”
Karan and Weiss decided to launch their beauty business in-house in 1992 after it became clear that no potential licensing partner would give the couple the creative control they sought.
Noting that the Donna Karan beauty business represented a “substantial business opportunity,” industry consultant John Horvitz said that “many of the largest players will be looking at this situation closely.”
“With its Ralph Lauren business, L’Oreal has demonstrated that with proper management expertise and an organization capable of worldwide distribution, they can build a significant business, just as Unilever has done with Calvin Klein,” Horvitz continued.
While Diana K. Temple, cosmetics analyst for Salomon Bros., declined to discuss potential alliances for Karan, she said that such an alliance is necessary for the company to maximize its potential in the department store arena.
“Designers like Calvin Klein, who have had the best success, have tended to have a strong affiliation with a strong beauty house, because the intricacies of creating and marketing an image-oriented beauty product are somewhat different from apparel,” she said. “Donna Karan has a good name, and if she continues to be very productive and in tune with today’s lifestyle, it is a brand that can grow.
“But it’s tough out there, and you need critical mass,” she continued. “Forty-five million dollars is too small to be profitable in the department store fragrance business typically.”
Dillon Read’s Schaeffer agreed, noting, “Most of Wall Street was a little surprised that Donna Karan decided to do it on her own originally, and we’re encouraged by the decision to either sell the company or align with somebody who is a major player in the business and can maximize the business.
“It’s difficult for an apparel company to run a beauty business,” he continued, “because the amount of advertising, research and development, and promotion needed is above and beyond what an apparel company is committed to spend.”