COST CUTTING PAYS OFF FOR DONNA KARAN AS JEANS, LICENSING STAR
Byline: Vicki M. Young
NEW YORK — Its women’s wholesale business is still contracting, but diversity paid big dividends for Donna Karan International in the fourth quarter.
John Idol, chief executive officer, said Tuesday that slumps in its women’s apparel and accessories were offset by surging sales of fashion denim and men’s wear. Keeping the momentum going, the company will soon launch DKNY City shoes, and the DKNY City collection launched at retail about four weeks ago with “initial results very positive.”
Idol was less verbal when asked about reports in the market that the company also was likely to open several new retail sites this year, most likely in the fall. He declined comment about a number of locales said to be targeted by DKI including: San Francisco’s Union Square; Rodeo Drive in Beverly Hills; sites along Michigan Avenue and Oak Street in Chicago; Dallas for a Collection store, and Miami’s South Beach area.
For the quarter ended Dec. 31, the company’s income skyrocketed 217 percent, to $8.9 million, or 40 cents a diluted share, from $2.8 million, or 13 cents, in the comparable 1999 quarter.
The latest quarter includes charges of $2.4 million in connection to the proposed LVMH Moet Hennessy Louis Vuitton merger and a $6 million income tax credit. The same 1999 quarter included $11 million in restructuring and other nonrecurring charges and a $4 million income tax credit. In the 2000 fourth-quarter results, however, the exclusion of costs related to the merger and the reversal of the tax valuation allowance leaves DKI with a bit of an earnings shortfall at $4.3 million, or 19 cents, 1 cent short of the 20-cent-a-share consensus from First Call/Thomson Financial. The comparable earnings per share for the 1999 fourth quarter was 20 cents, according to Idol.
Not only did diversity pay off for DKI, but so did discipline. Cost of sales declined more than $10 million in the quarter, to $108.7 million, and more than $6 million for the year in total, to $444.8 million.
Revenue for the fourth quarter was down 6.2 percent, to $165.7 million from $176.6 million, hurt in part by a drop in the women’s wholesale and accessories businesses. Operating income, however, shot up to $5.7 million, compared with last year’s operating loss of $1.1 million.
Shares of the stock closed at $8.60, down 2 cents in trading on the New York Stock Exchange.
As reported, a special committee of the DKI board is mulling over the company’s options in light of LVMH’s proposal to acquire DKI. Idol said there was no further information at this time, other than that the special committee was still reviewing all options. As reported, one of those options is DKI remaining as a standalone public company.
LVMH has already said it would acquire Gabrielle Studio from Donna Karan, the designer and her husband, Stephan Weiss, for $450 million. If LVMH is successful in acquiring DKI soon, Tuesday’s earnings announcement could be the last such statement ever posted by DKI as a public company. LVMH said it would combine DKI and Gabrielle Studio into a combined entity, with the designer holding the post of chief designer.
Harvey Robinson, an analyst at The Chapman Co., said that he expects a deal between DKI and LVMH to close sometime “this year.” LVMH in December offered $8.50 a share for the DKI stock, or about $195 million in cash. According to Robinson: “We’ve said before that the transaction could close a bit north of the original offer.” He observed that if LVMH also were to successfully acquire DKI, it would have “significantly more leverage” having Gabrielle Studios also under the same umbrella, due to operating synergies.
According to Robinson: “Given the difficulties in the apparel market, the numbers look good. In 2000, the women’s wholesale market was difficult. It’s been highly competitive, with some challenges over the last several quarters because of competition for space throughout the department stores. The men’s business is one of the pieces that is working.”
Robinson noted that it is the licensing agreements in men’s wear over the last 18 months that have contributed to the company’s growth. “The upside to the men’s business is that it should get stronger in the next several quarters in terms of growth,” he said.
Idol told WWD Tuesday that while the women’s business had a continuing decline in the U.S., wholesale sales were also brought down because of the transition of Japan and Asia to a licensed business.
A strong cash cow for the company has been its jeans business. “It’s doing well because we are really rolling that business out. We increased our doors substantially throughout Europe,” the ceo said. He explained that the company now has sales agents who have been showing the line in seven countries, giving the company the type of penetration and reach in the specialty stores that it didn’t have before the agents were hired.
According to Idol: “In accessories, our handbag business has been very strong, with double-digit sales increases at retail. Our shoe business has experienced some declining sales on the bridge side. We think that is going to dramatically turn around in spring, both on the bridge side and [through] the introduction of DKNY City shoes.”
For spring, two hot sellers are leather — particularly luggage leather products — and fashion denim. “Denim has been hot in the stores, from embellishment to very interesting washes. Clearly what’s been selling is fashion denim. We’re also not seeing any slowdown in leather. It’s been very good for our fourth quarter and for spring, leather has surpassed our expectations. We’re selling out of items in the stores,” the ceo said.
Idol, while cautious about the outlook for 2001, remained optimistic. “When you have the right assortments, have it in stock, the business will be there. Obviously that’s a tough balance to hit right. Our men’s business, however, has been strong. In accessories, we see an uptick and DKNY International continues to perform well. There are very strong indications from spring selling,” he said.
For the year, DKI posted a 91.2 percent jump in income, to $19.2 million, or 87 cents a share, from $10 million, or 46 cents, in 1999. Both 2000 and 1999 results include charges and credits similar to the ones reflected in the fourth quarter, with the exception of 1999, which also included a one-time $5 million credit in connection to a beauty licensing agreement. Income for 2000 would have been $14.6 million, or 66 cents, excluding the costs related to the proposed merger and the reversal of the tax valuation allowance. The comparable 1999 EPS, according to Idol, was 40 cents.
Revenue for the quarter was up a mere 0.1 percent, to $662.7 million from 1999’s $661.8 million. Operating income, however, was $24.9 million, compared with $14.7 million in 1999, a 69.9 percent hike. DKI said that it achieved worldwide global product sales of $1.2 billion in 2000, including licensees’ wholesale sales, a 16.1 percent increase from 1999.
The segment that did the best in 2000 was international jeans, ahead 70.4 percent in revenue. Revenues jumped 28.8 percent in the licensing business and 10.3 percent in the men’s wholesale business. Women’s wholesale sales dropped 14.2 percent, the accessories segment also was down 5.8 percent and the retail segment dipped 2.8 percent.
The ceo noted that the retail segment was hurt by lackluster results in the outlet division. The company also is planning to open a DKNY store in SoHo in August and a Collections store in the South Coast, Florida, area in April.
In the freestanding stores, Idol said, about 55 percent of store sales are from the women’s apparel category; 25 percent from men’s wear; 15 percent shoes and accessories, and the balance from lifestyle products offered at the sites.