What started as the dream of a tailor’s daughter on Long Island, wove its way through the design studios of Anne Klein and navigated the choppy waters of Wall Street and Seventh Avenue, has grown to become a $1 billion-plus symbol of urban sophistication and the wardrobe of choice for professional women.
The Donna Karan International phenomenon erupted in the Eighties, sought fortunes in the public arena in the Nineties and was ultimately purchased by LVMH Moët Hennessy Louis Vuitton in 2001. Through it all, Donna Karan persevered as one of the most influential fashion designers of the late 20th century and remains a major force in the industry today, with a company that generates roughly $1.4 billion in retail sales worldwide, including licensees.
When handpicked at the age of 25 to succeed Anne Klein as head designer of Anne Klein & Co. following the designer’s death in 1974, Karan proved she not only had formidable design skills, but could handle the pressure of the fast-paced fashion world. But after a decade designing for Anne Klein with Louis Dell’Olio, Karan struck out on her own in 1984 — in what she characterized as one of her toughest decisions — forming the Donna Karan Co.
Backed by Takihyo Co., a Japanese textile-apparel conglomerate that owned Anne Klein, Karan and her husband, the late Stephan Weiss, had a 50 percent stake in the firm, while partners Tomio Taki, president of Takihyo, and Frank Mori, principal in Takihyo and chief executive and part-owner of Klein, owned the remaining half.
In her first interview announcing her new business in 1984, Karan told WWD, “It will be a very personalized statement by me. Not that Anne Klein had not been, but Anne Klein has been a cooperative effort between Louis [Dell’Olio] and myself. Louis and I were Anne Klein. Donna Karan will be something different.”
And that it was.
Based on “seven easy pieces,” Karan invented a wardrobe for the professional working woman. Designing clothes that looked good on tall, statuesque women like herself, Karan put the emphasis on comfort, fit and sex appeal, and designed clothes to enhance women’s figures. It all began with the bodysuit that snapped under the crotch, and Karan designed clothes that draped, wrapped or tied around it.
Like many female designers, most of her ideas came from her own needs.
Within 12 months, Karan had a commercial — and critically acclaimed — success on her hands. Her collection sold out faster than many other designers, and when she would do a personal appearance, she would create a frenzy in the dressing rooms, going in there with customers and showing them how to wear her clothes. From the outset, Karan sold her sportswear to stores such as Saks Fifth Avenue, Bloomingdale’s, I. Magnin and Bergdorf Goodman. In fact, in a story in the New York Times Magazine on May 4, 1986, Bergdorf’s reported that Karan’s line had the highest sales per square foot of any designer in the store.
Although things didn’t always run smoothly at Donna Karan — complaints of late shipments were routine — the business continued on a hot streak and grew in many ways. Karan accessorized her sportswear with jewelry from Robert Lee Morris, and added categories such as hosiery, accessories, footwear, eyewear, beauty, intimates, men’s wear, men’s accessories and home, as well as DKNY clothing, jeans, footwear, accessories, eyewear, hosiery, kids’, home and men’s.
Establishing Karan’s international presence has always been viewed as a major opportunity for DKI, and over the years, the company opened freestanding Donna Karan New York stores in Manhattan; Costa Mesa, Calif.; London, and Tokyo, as well as 28 DKNY stores in such cities as Manhattan; Beverly Hills; Short Hills, N.J.; Cherry Creek, Colo.; Boston; King of Prussia, Pa.; Costa Mesa, Calif.; London; Manchester, England, and Tokyo.
Innovative and dramatic ad campaigns over the years, featuring such stars as Iman, Demi Moore, Bruce Willis, Jeremy Irons, Milla Jovovich and Cate Blanchett, as well as those featuring Manhattan skylines and scenes, helped solidify Karan’s image as the designer who understood women’s lifestyles and their wardrobing needs. But while Karan had a clear understanding of women’s necessities, she was less savvy about Wall Street’s demands.
In 1993, Karan planned to take the company public, but in November of that year, decided to postpone it because company officials believed the timing wasn’t right.
In a 1994 interview, Weiss, who shared the ceo responsibilities with Karan from 1993 to 1995, denied there were problems in the house of Karan, saying, “We have grown at an incredible rate. What we’re doing now is trying to solidify our growth and make sure everything sticks.”
Speculation had been fueled by late shipments of the collection; the postponement of the IPO; numerous layoffs; closing the firm’s children’s business; sales declines in the once-powerhouse DKNY women’s business, and increased friction among partners Taki and Mori, and Weiss and Karan. Taki and Mori had reportedly wanted to cash out of the business through the IPO, which was postponed indefinitely because earnings at the time were “below plan,” and the company thought it wouldn’t realize its full value in the public market.
Observers attributed some of Karan’s problems to expanding too quickly. Weiss noted at the time, “When we started the business, we were sitting on a runaway horse. My experience was to pull back the reins.”
Some observers believed the beauty business, which was developed in-house in 1992, had been a drain on the firm’s finances and that it might have put less stress on the bottom line had it been licensed to a fragrance expert — which it ultimately was, to the Estée Lauder Cos.
In 1996, Karan decided to test the waters again. The firm filed for an IPO in 1996 that was expected to raise between $230 million and $265 million. This marked a healthy increase over Karan’s aborted IPO in 1993, which sought to raise $215 million. Karan and Weiss got $58 million from the proceeds, as did partners Taki and Mori.
Karan’s stock was offered to the public at $24 a share in June 1996. In its first day of trading, Karan soared to 30 1/8, based largely on expectations for the brand. That remained the historic high for the stock, which traded as low as $4.25 on Dec. 5, 2000.
The day the firm went public, Karan, dressed head-to-toe in a black Donna Karan outfit, went down to Wall Street and rang the bell to start the day’s trading session. A black-and-white Donna Karan flag hung over the street.
For the most part, the stock took a pounding throughout its five years on the New York Stock Exchange. Many shareholders, initially optimistic about Karan’s prospects, ended up losing a lot of money in the stock.
Nearly a year after the company went public, John Idol succeeded the designer as ceo. Several days later, longtime president and chief operating officer Stephen Ruzow abruptly left the firm.
In Idol’s first interview at the helm, he said he hoped the company would be back in the black in 1998. There would be a 15 percent reduction in the workforce, the consolidation of operating divisions to six from 13 and the costs to license its jeans and beauty businesses. Idol admitted that there had been delivery and quality issues, and said he was taking steps to fix that. He also said he planned to increase the number of company stores and licensed divisions.
Idol’s plan was revealed the day after he announced a major licensing deal with Liz Claiborne Inc. for jeanswear and activewear that emphasized the firm’s commitment to licensing, a strategy Karan largely spurned in the past. The financial community had been eager to see Karan license the jeanswear business, viewing it as a real opportunity for steady income and another way of reducing costs. Idol characterized the firm’s performance in 1997 as “both disappointing and unacceptable.”
Despite the company’s losses, Karan and Weiss received $17.6 million in royalties for 1997. Their huge financial gains would remain a habitual sore point for stockholders. In a somewhat unusual and very lucrative deal, relative to the rest of the apparel industry, Karan and Weiss received royalty payments through their wholly owned company, Gabrielle Studio, which controlled the rights to various Donna Karan trademarks. The Gabrielle Studio agreement provided for annual royalties of 1.75 percent of the first $250 million in sales, plus 2.5 percent of the next $500 million, plus 3 percent of the next $750 million, plus 3.5 percent of all sales over $1.5 billion. So while stockholders lost significantly on Karan stock, the designer and Weiss made considerable profits.
It was Weiss’ idea to sell Karan’s company to LVMH, a deal that was first announced in December 2000 and was expected to turn Karan into a global luxury goods player. On an acquisition binge, LVMH was to acquire Gabrielle Studio, which was owned by Karan and Weiss, for $450 million. However, as an incentive to get the DKI deal done quickly, Karan and Weiss agreed to reduce the price of Gabrielle Studio by $50 million, if the DKI acquisition was completed by June. The deal was done by April 12, 2001, and consequently, LVMH paid $400 million for Gabrielle Studio and $243 million for DKI. Again, Karan and Weiss received a financial windfall.
When LVMH first announced it was acquiring DKI, the company was hit by at least two shareholder lawsuits seeking class-action status and charging that the acquisition price was too low. The final deal represented a premium of 26 percent over the $8.50 price initially proposed by LVMH.
With the sale complete, Karan continued as chief designer and retained her creative leadership in the combined entity. Karan and Weiss agreed to exchange a significant portion of their DKI shares for, and intended to purchase 14.3 percent of, the new entity, with LVMH owning the balance. LVMH planned to continue to operate DKI as an autonomous lifestyle company in the LVMH Fashion Group. A completed deal with LVMH ended the difficult, often strained relationship between Karan and Wall Street.
“The fashion industry is not by quarter,” a relieved Karan said. “To this day, I don’t think I’ve deviated from Day One, what I’d like the company to be. Sometimes to accomplish those goals, you don’t fit into a quarterly plan.”
In June 2001, just two months after the deal closed, Weiss, then vice chairman and a director of DKI, died of lung cancer.
Karan has said the deal never would have happened had it not been for her husband. “He had a vision when we started Donna Karan. He created this. Stephan definitely steered the ship on this.”
Observers believe Weiss showed exceptional savvy in the way he set up Karan’s firm.
“Stephan Weiss was a very unusual man and very creative. He had an intellect and a creative force working in him,” said Harry Bernard, executive vice president and chief marketing officer at Colton Bernard, the San Francisco consulting firm. “He was one of those rare people who had an incredibly elevated vision with his feet planted firmly on the ground. And, he was quite shrewd.
“Gabrielle Studio was almost like a cross between a trust fund and a holding company. It was unusual, in the way it was structured,” Bernard added, noting, even when Karan’s firm was public, and shareholders lost a lot of money, Karan profited enormously. “They [Karan and Weiss] were lucky and astute.”
Allan Ellinger, senior managing partner of MMG, an apparel consulting firm, however, pointed out that it’s not that unusual for a designer firm to set up a separate holding company precisely to protect the trademark. “Very often, a bank wants a company to pledge its assets, such as inventory and receivables, and typically they ask for your trademarks,” he said. “To protect your trademark, you set up a separate company. When the company went public, it wasn’t dealt with at the time, and Donna’s income was not driven by the company’s profitability.”
Despite having its financial problems over the years, Ellinger believes that the launch of Donna Karan in 1984 was “the last great designer introduction.”
Interviewed last year, Karan described the Donna Karan brand and its DKNY counterpart as having grown larger than she could have imagined when she started the company with her late husband.
“It’s a picture that’s much larger than me,” she said, “but the potential here is humongous. I don’t think in any way, shape or form it has reached its potential.”