GOOD YEAR FOR DONNA: GABRIELLE STUDIO DEAL NETS DESIGNER $25M

Byline: Thomas J. Ryan

NEW YORK — Donna Karan is doing OK. The Donna Karan Inter-national Inc. 10K issued Monday showed that Karan, chief designer and chairman of Donna Karan International, and her husband, Stephan Weiss, received $25 million under the designer’s controversial Gabrielle Studio licensing agreement last year.
That compares with payments under the licensing agreement of $19.5 million in 1998 and $17.6 million in 1997.
Gabrielle Studio is a company solely owned by the designer and her husband, which controls the rights to various Donna Karan trademarks. The Gabrielle agreement provides for annual royalties of 1.75 percent of the first $250 million in sales, plus 2.5 percent of the next $500 million, 3 percent of the next $750 million and 3.5 percent of all sales over $1.5 billion. These sales include amounts derived from licensees.
Karan’s earnings last year rose to $10 million, or 46 cents a share, from $128,000, or 1 cent, a year ago. Sales climbed to $661.8 million from $622.6 million.
Many shareholders and Wall Street analysts have complained about the licensing agreement, which was set up when the firm went public in June 1996. Complaints have grown more bitter as Karan’s stock has continued to severely underperform, in spite of signs the firm is turning around as it focuses on expanding licensing and retail while improving margins in its wholesale accounts.
Karan went public at $24 a share, with great fanfare, in 1996, but closed Monday at 7 7/16, down 1/4, on the New York Stock Exchange. It’s still trading close to its 52-week low of 6 1/8.
Karan’s direct compensation for 1999 is not yet available, since the proxy has not yet been filed with the Securities and Exchange Commission. In 1998, Karan received a $500,000 base salary, but no bonus because of the firm’s disappointing results. In 1997, she opted not to receive a bonus she was entitled to because of the poor performance of the stock.
As expected, Karan herself has been hurt by the descent of the firm’s stock; she personally owns 5.2 million shares, or 24.3 percent of shares outstanding, according to Karan’s proxy. The shares were worth $38.6 million at Monday’s close compared with $157 million at its June 1996 high of 30 1/8. Three investment firms that follow the company all currently have “moderate buy” recommendations on the stock.
Karan officials have told shareholders that the Gabrielle licensing agreement was fully disclosed in the prospectus for the initial public offering and they have no plans to rework the agreement. Yet the Gabrielle licensing agreement still draws shareholders’ ire, partly because none of the other major designers, including Tommy Hilfiger and Ralph Lauren, have agreements to rent their names back to their firms.
Nonetheless, these designers aren’t doing badly at all. Hilfiger received $22.28 million in salary and bonus from Tommy Hilfiger for the firm’s year ended March 31, 1999, up from $14 million the prior year, with the pay hike traced to the May 1998 acquisition of Pepe Jeans, which owned Tommy Jeans and the women’s lines, and its former Canadian licensee. Some analysts and shareholders questioned at the time whether Hilfiger’s employee contract would be renegotiated, given the huge hike in revenues, but, like Karan, Hilfiger’s contract was unchanged. Pepe and Hilfiger Canada were partly owned by Hilfiger and management, and Hilfiger received an estimated $260 million in cash and stock in the acquisition.
Lauren, who is also chief executive officer of Polo Ralph Lauren, was compensated $6.9 million last year, including a $1 million base salary and $3.4 million in company-paid life insurance for Lauren and his wife. Lauren’s major incentive is his 44 million shares, worth about $900 million at current prices.
Karan’s 10K noted several areas of improvement, including operating earnings at its wholesale segment, which rose to $14.6 million from $12 million. The latest year included $3.6 million in consolidation charges to combine the Donna Karan and DKNY women’s business into one operating division. Excluding these charges, earnings rose 51.7 percent to $18.2 million. Wholesale sales eased to $496.3 million from $510.9 million as decreases in the women’s business and the licensing of DKNY Kids negated gains in men’s wear and accessories.
Licensing operating income grew to $18 million from $6.4 million, and the latest period including a onetime licensing credit of $5 million related to its beauty license with Estee Lauder Cos. The firm cited gains in its DKNY/Claiborne license and its Japanese business.
The filing also noted the firm received $6.4 million from Liz Claiborne in December as part of its agreement for Claiborne to launch a still unnamed DKNY line in the better market for spring 2001.
The one clear weak spot was retail, which swelled its operating loss to $17.9 million from $16.1 million. Excluding costs to close stores and $1.9 million tied to the opening of DKNY flagship store on Madison Avenue in New York, the loss in the latest year would have been $10.2 million. The retail area has particularly been hurt by poor results at outlet centers, and the firm’s goal is for outlets to reach $380 per square foot in 2000 from $325 in 1999. Sales at retail rose to $130.4 million from $93.3 million.
Sales at its expanding full-price stores — there are currently 13 — are doing well, with sales per square foot of more than $500. The company operates 54 outlet stores. The 10K also notes that backlog was $288.2 million at March 14, up from $252.7 million at March 24, 1999.

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