“The fashion business is like a roller coaster,” said Donna Karan. “We get on, and we’re in for a ride.”
Few designer’s companies have experienced peaks and valleys quite like the business trajectory of Donna Karan International. From the moment 20 years ago when her train left the station, it’s been a bumpy ride with mountainous climbs, hairpin turns and quite a few unexpected loops. A snapshot of this instant would place the business somewhere near the end of a dark tunnel, approaching a new beginning, but not knowing just what to expect on the other side.
The past three years have been a tumultuous period, since LVMH Möet Hennessy Louis Vuitton acquired the company in a deal with the designer and public shareholders of Donna Karan stock. From the moment a deal was announced in December 2000, reports of friction between Karan and LVMH executives have clouded the successes of the companies in improving the economic situation at the house, where sales have declined considerably, but profitability and the quality of full-price business have improved.
The challenges of that integration have also led to persistent speculation that LVMH has tried to sell the company, but has not been able to attract a comparable bid to the grand total paid for Karan’s assets: $687 million ($400 million for the trademarks, $243 million to stockholders and another $43.8 million to the designer this year to increase its stake to 98 percent from 89 percent). Despite those rumors, LVMH maintains that its commitment to Donna Karan remains steadfast.
“Donna Karan is a great brand with a lot of growth potential that we are investing in and actively bringing up to speed,” said LVMH chairman Bernard Arnault. “It’s one of the ‘big three’ in the U.S. It has a very dynamic future.”
Asked if LVMH considered selling Karan, Arnault replied, “We aren’t interested in selling.”
On both sides of the equation, there appears to be a renewed commitment to rebuilding the Karan empire, which was damaged by its tenure as a public company and the rough handover to LVMH. Transitioning from John Idol, who was chief executive of DKI until the sale to LVMH, to Pino Brusone, to Fred Wilson and then to Jeffry M. Aronsson last year, the company has had its share of management shakeups, although the succession of Wilson to Aronsson was somewhat more organic, their being close friends.
“My executive management has moved around a bit,” Karan conceded. “They can’t keep up with me.”
In its most recent quarterly report in April, LVMH noted that Donna Karan revenues were down about 30 percent in dollar terms due to store closures and the loss of sales from the European jeanswear business, which is now licensed. Sales of overall merchandise are believed to be at about $700 million now, including licensed collections, hit by a number of factors in recent years including terrorism and war, as well as restructuring efforts that have pulled Donna Karan branded products out of undesirable sales channels. A research note published this month by Antoine Belge, luxury analyst at HSBC in Paris, described Donna Karan as “barely” profitable in 2003.
Despite these circumstances, there is a sense within the company that a turnaround is in sight. Aronsson has made a concerted effort to promote a positive atmosphere for the many employees who have expressed concerns about reports of hostility with LVMH.
“In the midst of all this, it’s gratifying and exciting to see people rallying toward common goals,” Aronsson said. “Our turnaround is about embracing our customers one at a time, and building our successes on top of one another.”
Aronsson reported that Donna Karan is at least making plan in many of its retail accounts for the first time in four years as a result of restructurings initiated by his predecessor, which he continues to carry out, such as improving its rate of making on-time deliveries, widening the assortment to better fit the stores’ needs and offering transseasonal collections. This is a point that retailers would not argue.
Robert Burke, vice president and senior fashion director of Bergdorf Goodman, said, “Our business has been solid with Donna Karan, and we find that the merchandising has been very focused. They have made a concerted effort to have a line that is easy for the merchants to buy, and more important, easier for the customer to put together and understand.”
Fred Wilson was ceo of Donna Karan for 18 months before being recruited to Saks Fifth Avenue Enterprises, where he now oversees one of Karan’s largest retail customers for the designer collection. From his new vantage, Wilson said he believes the company is on the right track.
“They have been for some time, just keep it coming,” Wilson said. “Donna is one of the most creative people on the planet Earth. Her ability to design and create is spectacular. She is also very level-headed and has a very good sense of how business works. She is a great partner.”
Every step the firm makes to clean up its image and distribution, however, is seen by analysts as more evidence that LVMH is preparing a sale of DKI. Antoine Colonna, luxury analyst at Merrill Lynch in Paris, said LVMH is likely to sell Donna Karan and noted, “I don’t think they would want to keep it for the long term if they get offers for it. In any case, they want to make it clean so potential bidders will be interested.”
One issue that has continued to dog the conglomerate in regards to Karan is what some retail observers have labeled a lack of due diligence prior to its acquisition of her trademarks, a deal that was worked out quietly to avoid a potential bidding war with other interested suitors at a heady time for acquisitions, when cost was secondary and there weren’t many established designer lines up for grabs. But this is a point of some debate among analysts and also one of only many issues relating to the integration of the business.
HSBC’s Belge said at the time LVMH bought Donna Karan, he did not believe LVMH had overpaid. In retrospect, however, he said it could be argued the French group did not do due diligence. “At that period, many [luxury] groups were making acquisitions rapidly without enough due diligence. [LVMH] underestimated the work that had to be done at Donna Karan.” Belge said Karan “didn’t exactly fit” in LVMH’s luxury portfolio.
Colonna said he believes LVMH got a “good deal” for Karan. Yet he said the acquisition also showed LVMH’s limitations in trying to build an American brand on the same model the luxury group had employed for its European brands, which is to say the utilization of European sourcing and production as well as directly controlled distribution.
“It was the end of the perception that [LVMH executives] could use the European recipe for an American brand,” Colonna said. “Today, the dream has been replaced by pragmatism.”
Both LVMH and Donna Karan appear to be making the best of the situation by trying the build the brand. The company has repositioned DKNY with finer fabrics that have caused the line to nearly double in price at retail, while both the collection and DKNY lines have introduced a stronger assortment of accessories, Aronsson noted.
“This has all been a process of rediscovery of who and what we are and getting back to our roots,” Aronsson said. “We are getting back in touch with what made this company great. We are resecuring a great foundation upon which to build. That, in a way, is a great metaphor for what Donna Karan does — creating a foundation for a system of dressing, starting with a bodysuit and adding can’t-miss fashion.”