KARAN’S BEAUTY: DECISION TIME
Byline: Pete Born
NEW YORK — With 49.8 percent growth this year, Donna Karan’s beauty business may be on a fast track, but it appears the company will need some outside muscle to push the business to the next level.
The need for help became evident on Monday when the company said it was ready to give up control of its Donna Karan Beauty Co., which was launched in 1992 with the introduction of its first signature fragrance, Donna Karan New York. The possibilities include a joint venture, licensing deal or sale.
As reported in its third-quarter financial statement, the company said that while the beauty division posted a 74 percent sales increase for the quarter, that figure was $5 million below an obviously aggressive plan. Stephen L. Ruzow, president and chief operating officer, said fourth-quarter sales are also expected to fall below expectations, and the company expects to post a loss of $900,000 on sales of $20 million for the period.
During a subsequent interview, Karan and Stephan Weiss, her husband and company vice chairman who still oversees the beauty company, explained the third-quarter shortfall, while putting a positive spin on the future of the beauty division. Weiss indicated the company is open to a variety of possibilities, including a joint venture deal involving a transfer of equity.
The picture that emerged depicted the beauty division at a crossroads in its development. “We find ourselves in an enormously interesting dilemma,” he said, referring to the strains brought on by aggressive sales growth.
During the past four years, Karan has built a total beauty company, including bath products, skin care, hair care, a men’s fragrance, a second women’s scent and even a home fragrance line. Driven by a 49.8 percent sales increase this year, wholesale volume has reached $45 million, while falling short of profitability, according to company executives.
“We have an extraordinarily successful beauty business,” Weiss said. “Are we going to put it on a shelf and let it atrophy?” he asked. “Or are we going to drive it forward? To do that we need capital.”
At the same time, Karan’s much-larger apparel business needs care and feeding, with retail stores and shops-within-shops presenting opportunities. Now that the company is public, Weiss noted, there is less financial flexibility. “In order to capitalize growth,” he said, “the company has to focus on areas where it can get ROI.”
As for the beauty business, cash is needed to drive research and development and fuel advertising, allowing the company to enter the color cosmetics category, further explore treatment and introduce a new round of fragrances, DKNY for women and men. A DKNY women’s scent has been tentatively slated for 1998, according to Jane Terker, beauty company president.
Weiss said the $5 million shortfall in third-quarter sales was due to the 1995 men’s scent, DK Men, which admittedly has not lived up to expectations. Terker said the company erred in making it a nonpromotional brand. Value sets are being added for Christmas, and a gift-with-purchase promotion will be staged in the first quarter to make the scent more commercial in the hyper-competitive men’s arena.
Also, the skin care line, launched in October 1995, has proven to be a slow build, and the department store business has turned out to be even tougher than expected, exacerbated by the advent of computerized inventory controls.
Weiss and Terker stressed that the company is on plan with its new Chaos women’s fragrance, first launched at Bloomingdale’s Oct. 6. Similarly, the Scents & Sensibility home fragrance line, launched in September, is out of stock, Terker said. The executives brandished sell-through reports indicating a resounding impact of Chaos in select doors, but also showing surprising double-digit growth of the four-year-old signature women’s fragrance.
At Bloomingdale’s, where Karan first launched her beauty company, the line is still strong, and “it’s in my top three or four brands,” said Michael Gould, chairman and chief executive officer.
Gould pointed out that other major designers — Calvin Klein, Ralph Lauren and Giorgio Armani — have licensed out their beauty businesses, and he said Karan is smart to follow suit. “Having spent time in that business,” said the former president of Giorgio Beverly Hills, “I know the kind of effort it takes to run a beauty business. Considering the resources needed, the attention needed and the different mind-set that is required, they would be best served to run it out of house. I applaud them.”
Allen Burke, divisional merchandise manager of Dayton’s, Hudson’s and Marshall Field’s, noted, “The original fragrance is in fact growing, and it is major player.” Chaos just arrived, he added, but “the initial numbers look encouraging.”
“We have a very-well-established business with them and the original fragrance is still growing,” said Margo Scavarda, senior vice president and general merchandise manager at Macy’s West. “There is a wonderful following,” she added, noting that the brand ranks in the top five in the stores where it is sold.
Weiss said the spinoff of the beauty company would follow similar strategies used by Karan in the jeans, hosiery and children’s wear business.
Karan originally decided to launch her own beauty business, Weiss said, because cosmetics companies refused to give her enough say in conceiving products or developing the business.
Karan, who typically thinks about the little details — the hosiery or the belt — before creating her sportswear, said all the potential cosmetics licensees were only interested in a fragrance deal.
“They would not talk about color,” Weiss said, “and they would not talk about treatment products.”
Karan’s approach is more organic, thinking “woman to woman” and coming up with products that are needed in the market, he added.
As for the future, Weiss said the company has received some inquiries, but has had no talks. The board is open to a variety of possibilities — be it a Wall Street financial group, a large pharmaceutical house or a cosmetics company. “What is important,” he said, “is that a joint venture partner understand the gestalt that was used to build this business.”