WOMEN’S STILL LAGS, BUT DONNA MOVES FURTHER INTO BLACK
Byline: Thomas J. Ryan / Miles Socha
New York — Is the turnaround at Donna Karan International real or ethereal?
That question has been asked of the company the last few quarters as it wrestled with profitability, and on Tuesday, chief executive officer John D. Idol answered definitively: The designer firm reported greatly improved financial results for the fourth quarter and the year ended Jan. 2.
“We think it’s real,” he stressed in an interview. “[The results] are actually slightly ahead of where we anticipated. We came in above Wall Street. It really means all our strategies are taking hold.”
In the quarter, Karan earned $2.8 million, or 13 cents a share, against a $3.2 million loss a year ago. Results exceeded Wall Street estimates of 10 cents.
While its core women’s apparel business and outlet stores continue to lag, men’s wear, accessories, full-price retail and licensing are seeing nice momentum, Idol said. “When you start looking at some of these numbers — I mean, when you look at sales in our full-price retail stores of $500 per square foot — that’s sensational,” he said.
The profit in the latest quarter came despite an $11 million charge ($6.3 million after-tax) to close seven outlet stores and lay off 175 employees. The charge was first announced in November. The latest quarter also included a $4 million credit related to deferred taxes and $1.4 million of unspent restructuring reserves.
Excluding nonrecurring items, earnings were $4.2 million, or 19 cents, in the latest period. Sales gained 20.9 percent to $176.6 million from $146.1 million.
Idol said the results reflect improved gross margins and tight expense and inventory controls. “I feel very good about what we accomplished,” he said. “We think that next year is shaping up to meet our expectations.”
Karan is on vacation and was not available for comment.
As reported, Karan’s goal is to have revenues this year of between $650 million and $700 million and pre-tax margins of 4 to 5 percent. Pre-tax margins are expected to increase to 6 to 8 percent next year, which Idol described as a more acceptable level of profitability for a designer-level company that will help shore up its stock price.
Shares of Donna Karan closed at 8, up 9/16, Tuesday on the New York Stock Exchange.
On a conference call with analysts, Idol broke out the company’s performance by segment and stressed that the company, long dependent on wholesale for up to 90 percent of sales, continues to make progress in diversifying its revenue stream. In 1999, wholesale accounted for 75.6 percent of revenues, retail 19.8 percent and licensing 4.6 percent. Wholesale sales in the quarter advanced 15.5 percent to $127.1 million. The star performers were the international DKNY Jeans business, up 54.7 percent; shoes and accessories, up 25.9 percent, and DKNY Men’s, up 52.4 percent. However, women’s dropped 9.1 percent due in part to the transition of the Donna Karan Japan business from an exclusively import business to primarily a license business. Idol also reiterated that women’s collection sales last fall were disappointing at retail because of the high prices and heavy weights of Karan’s blanket-dressing styles in double-faced cashmere.
Although women’s apparel has long been the core franchise of Karan, it accounted for only 47 percent of wholesale revenues last year, compared with 24 percent for accessories and footwear, 23 percent for men’s wear and 6 percent for international jeanswear.
Idol acknowledged that women’s will continue to decrease as a percentage of the total wholesale business, particularly as Asia will also soon convert to a licensed agreement. He also noted that the troubled and shrinking domestic bridge sportswear business does not bode well for growth in the core DKNY women’s franchise. The brand is currently in about 900 doors, and distribution will be deliberately trimmed out of 100 underperforming doors by the end of 2000. But he said DKNY women’s continues to grow at double-digit levels in Europe and through its network of full-price company-owned stores.
He also asserted that the DKNY brand in general has not yet reached the maturity of some of the other status players. As reported, some department stores see the once red-hot status casual business cooling.
“We’ve kept a very tight distribution,” Idol said. “I think the stores are looking at us quite frankly as a growth vehicle. We have not reached the maturity level that other brands have.”
In accounting for the substantial increases in accessories, Idol credited a new three-tier strategy with DKNY footwear, which offers styles priced at $69 to $99 under its “comfort” label and additional lower-priced styles under the DKNY Jeans brand. “Those categories gave us the ability to have some rapid door expansion,” he said.
As for men’s wear, he credited a 35 percent reduction in prices of the DKNY Men’s line and an opening in the market for “modern men’s sportswear” that is also reflected in the rapid growth of its licensed men’s shirts, ties, suits and pants lines.
Internationally, the DKNY Jeans line will be available in 750 doors in Europe, Asia and the Middle East this spring, compared with only 300 doors a year ago, he noted.
Turning to retail, a key strategy for the company, Idol reported that revenues in the quarter gained 31.8 percent to $40.6 million. Same-store sales grew 13 percent at its 13 full-price stores, but a slim 1 percent at its 54 outlets. Idol said the goal for the outlets is to reach $380 per square foot this year from $325 in 1999.
He said the retail division lost money last year, but declined to pinpoint the figure, which will be disclosed when the firm’s 10-K comes out early next month. He did say the losses were reduced from 1998, when the division posted a $16.1 million loss. In the first nine months of 1999, Karan said its retail division lost $5.3 million, an improvement from a loss of $12.7 million in the first nine months of 1998.
Idol said the company plans to add between five and eight full-price stores this year, possibly a few Donna Karan Collection stores. However, he noted that the opening of the Madison Avenue flagship Collection store, which will be owned and operated by a separate company controlled by Karan herself, has been delayed until February 2001 due to construction setbacks. It had been slated to open this fall.
Meanwhile, licensing revenues surged 69 percent to $8.8 million in the quarter. “We continue to make significant progress with this division and anticipate sustained growth for 2000,” Idol said. He noted that the new license for Liz Claiborne to make an as-yet-unnamed DKNY better line “has the potential to become one of the most important labels in the better market.” The line is set to bow in spring 2001.
For the year, earnings reached $10 million, or 46 cents a share, against $128,000, or 1 cent, a year ago. Before nonrecurring items and the tax credit, earnings were $8.6 million, or 40 cents a share, against $100,000, or 1 cent, a year ago.
Sales moved ahead 6.3 percent to $661.8 million from $622.6 million. Excluding a one-time credit related to a beauty licensing agreement with Estee Lauder in 1999 and without the sale of DKNY Jeans products to Liz Claiborne in 1998, revenues gained 10.2 percent to $656.8 million from $595.8 million.
The company told analysts it ended the year with no debt outstanding under its revolving credit facility and had $15 million in cash on its balance sheet. Inventories were down $7 million from the prior year. EBITDA (earnings before interest, taxes, depreciation and amortization) improved to $34.1 million in 1999 from $13.5 million in 1998.
Analysts agreed that the numbers suggest the company has rounded a corner.
“They certainly seem to be in the early stages of a turnaround,” said Harvey Robinson, at The Chapman Co., based in Baltimore. “What’s working is their full-price company-owned stores. That’s for certain. And men’s wear is going well, and that’s promising. But what they still need to address is the outlet business, and what I’d like to see is a turnaround in women’s wholesale.”
Josie Esquivel, at Morgan Stanley Dean Witter, agreed there is room for improvement. Net sales in the quarter exceeded her estimate by $13 million, led by better-than-expected wholesale sales, driven by men’s and shoes. Licensing revenues also beat Morgan Stanley estimates by $3 million.
But “on the negative side, the women’s side is still down and will continue to trend down this year,” said Esquivel. “They’re still in doors they shouldn’t be in. The product isn’t turning,”
Esquivel called 2000 “a starting-to-rebuild year” for Karan, considering the virtual completion of the cost-cutting initiatives and line-repositioning taken over the last two years. The question is whether Karan can spread the successes in its DKNY men’s business across the rest of its lines.
“Other than pulling out additional doors in women’s line and hopefully coming up with better product, I think the turnaround is done. So now we’ll see if it was successful or not.”
The cost-cutting and repositioning moves helped Karan improve gross margins to 33.2 percent of sales in the quarter from 25.1 percent a year ago, and selling, general and administrative expenses were trimmed to 28.4 percent from 29.1 percent.
Reminded that most of the company’s bright spots in the year and quarter came from the lower-priced segments of its business, Idol acknowledged that the DKNY brand is its biggest franchise, accounting for some $800 million of its estimated $1 billion worldwide sales.
However, he reiterated that its Collection brand will soon receive greater attention, now that repositioned efforts for DKNY are nearing completion.
“We very definitely believe in the growth potential of luxury,” Idol said. To that end, the company recently reintroduced Collection accessories and a revamped Signature collection, as reported.