G-III Apparel Group believes it can realize Donna Karan’s potential at last — but Wall Street isn’t so sure.
Viewing the acquisition of Donna Karan International as a “transformative event” for the company, Morris Goldfarb, chairman and chief executive officer of G-III, expects DKNY to become a $1 billion brand and Donna Karan to reach more than $300 million in wholesale volume over the next several years.
As reported, G-III — the $2.4 billion diversified apparel company — has entered into a definitive agreement to acquire DKI from LVMH Moët Hennessy Louis Vuitton for $650 million. The transaction is expected to close in late 2016 or early 2017.
“The $1 billion trophy for us, I believe will be DKNY,” said Goldfarb, on a conference call Monday — a number that would be more than triple DKNY’s current revenues of $300 million. He foresees huge opportunities for the brand in women’s and men’s footwear, handbags, intimates, jeans and resurrecting DKNYC, as well as home and cosmetics. Some of these lines the company will manufacture and others will be licensed.
He also anticipates a robust licensing program for Donna Karan.
In the short term, Goldfarb told analysts he expects to double the size of the overall business in less than three years.
“There’s no secret that some of the power brands in our universe are contracting distribution, either voluntarily or designed by the retailer, and it’s a perfect time to buy into the real estate that is going to be available,” Goldfarb said.
Despite Goldfarb’s enthusiasm for the deal, Wall Street wasn’t applauding the acquisition, sending G-III shares down 14.5 percent to close at $42.91 in Nasdaq trading Monday. Investors were more excited for LVMH, viewing the sale as the end of what has been a 15-year headache, and rare misstep, for luxury titan Bernard Arnault. Shares of LVMH closed up 1.5 percent to 144.45 euros, or $158.77 at current exchange, on the Paris Bourse.
Goldfarb was undeterred about the hit to his stock.
“That’s expected. We’ve never made an acquisition that really had the emotions of Wall Street in consideration. We bought a business that’s clearly dilutive to our earnings. It loses money. So we didn’t buy the brand for its earnings. We bought the brand for everything we’ve just described to you and the future of the brand. We can effect the future in a short period of time. It will be dilutive the first year that we own it. It will be accretive the second year, and the third year it will be extremely accretive,” Goldfarb told WWD.
Goldfarb believes the $650 million price tag was a great deal.
“We look at this as a bargain price for us. Where’s a power brand that can be acquired at this price? There isn’t. We’re grateful to LVMH for letting us buy it. If you look at pure earnings, as many investors are forced to do, they’d say ‘not a great investment.’ But if you look at potential and you have vision, it’s an amazing acquisition.
“The turnaround period is not going to be very long; the integration into our company is going to be almost seamless, and the capital expenditures for the future aren’t going to be huge. We’re not doing flagship stores out of the box. We’re not going to spend $5 million to $10 million in build-outs. We’ll accommodate the retail partners and do shops-in-shop, and we’ll spend money on marketing. But short of that, the efficiencies are going to be significant for G-III and Donna Karan.”
Goldfarb said that when the investor community sits back and reflects on what G-III has accomplished, they’ll embrace it. “It’s hard to convince somebody that this Seventh Avenue company is going to turn around a company that the largest and best luxury company in the world cannot do. So sitting in a room with investors, there might be a thought process that if LVMH couldn’t do it, why does G-III think it can? We’re different people. We service different demographics. We are an American company, primarily focused on distribution in America. We understand how that’s done,” Goldfarb said.
According to sources, the Donna Karan and DKNY brands were never at the core of LVMH’s portfolio and the group struggled for years to turn DKI into an American luxury brand in sync with its other holdings. Still, it was highly unusual for LVMH to divest of one of its properties, even though there were rumors for years it was looking to sell DKI. The last property it sold was Christian Lacroix to The Falic Group in 2005.
Donna Karan cofounded DKI in 1984 based on “Seven Easy Pieces” and a modern system of dressing that resonated with professional working women. She launched DKNY, which became a powerhouse of urban-inspired sportswear, in 1989. The company went public in 1996, and LVMH acquired it for $643 million in 2001.
In the latest attempt to turn around the company, LVMH appointed Caroline Brown, formerly of Carolina Herrera, as ceo and last year abruptly suspended the production of Donna Karan Collection to focus the entire company around the DKNY brand and removed Donna Karan from the top creative role. The company also replaced Jane Chung, executive vice president of design at DKNY, with Dao-Yi Chow and Maxwell Osborne, the founders and creative directors of Public School, who are now co-creative directors of DKNY. That business, which was intended to be energized by Chow and Osborne, was in the midst of a rebuilding mode, and had started to gain some traction.
Goldfarb said he’s in the process of evaluating the company’s needs and whether DKNY’s co-creative directors Chow and Osborne would stay with the brand. “They’re independent designers. This is not indentured servitude. We’ll figure that out before we buy the company. Right now we’re in contract. For the first time we’re able to speak to their people. Some we’ll keep and some we won’t.”
It hasn’t been determined yet if DKNY will have a spring runway show in September.
As for Brown, he said, “She’s an amazing business person.” Goldfarb said he will meet and talk with her and the two designers. “There’s been no discussion that they’re leaving after the transition,” he said.
While Goldfarb sees the biggest potential in DKNY, the Donna Karan label will also be having a revival.
“We’re going to take Donna Karan off the shelf, and we’re going to position it differently than DKNY,” added Goldfarb, noting he hopes to target Karan’s products to Neiman Marcus, Saks Fifth Avenue, Bloomingdale’s and Nordstrom.
He said they were working on a strategy but estimated that products bearing the Donna Karan trademark could do more than $300 million in volume in the next few years. “It’s literally the first day the curtain is drawn,” he said.
Asked whether he would have runway shows for Donna Karan, Goldfarb told WWD, “Sure. We look forward to it. We’ve internally discussed the merit of creating the couture piece of the business, which would be the halo component. We’ve not arrived at it yet, but it’s a consideration.”
Would Karan return in some capacity? Goldfarb said he didn’t know. He said he spoke to Karan in Bali on Sunday night to talk about the deal. “Donna is on vacation. She’s enjoying her life. She loves her name and she loves her brand. I made a phone call to her to let her know we’re going to protect it, and we respect it. It’s what we do,” he said.
Reached on Monday, Karan told WWD she had “no comment.”
Goldfarb said he approached LVMH last March, and initially the French group wasn’t interested in selling the brand. “But then over time, we convinced them it was the right thing to do,” he said. He noted that the brand was not shopped around and wasn’t on the selling block.
Pierre Yves Roussel, chairman and ceo of LVMH Fashion Group, added of DKI, “There was a positive momentum, but we got an offer from a financial perspective that was extremely attractive. They have the business model that fits well with the brand. We felt the brand was evolving in a way that was more their business model than our business model. They were willing to pay a significant price and they were keen about getting the brand. The price was right, the timing was right and it was the right acquirer.”
Roussel said LVMH has no intention of selling its other American business, Marc Jacobs, which also is undergoing a repositioning. He said LVMH has a very different business for Marc Jacobs, which has no outlets, has controlled distribution and does more accessories. The house also has a relationship and history with Jacobs himself, a former creative director at its powerhouse brand Louis Vuitton.
Unlike G-III’s previous licensing deals with companies such as Calvin Klein, Tommy Hilfiger and Karl Lagerfeld, this deal is completely owned by the company, and it will now be up to G-III to grow it. The latest addition will undoubtedly give G-III additional leverage when it approaches a department store, having such lines as Tommy Hilfiger, Calvin Klein, Ivanka Trump, Lagerfeld, and now DKNY and Donna Karan in its arsenal. Goldfarb intends to target DKNY to stores such as Macy’s, Lord & Taylor and Dillard’s.
Goldfarb said he was attracted to owning the brand outright. “Taking a power brand like Donna Karan — and having the ability of owning it and creating a template for the future with Donna Karan and DKNY — is certainly better than being handed a template to go down the path of. This is destined to be a very big piece of G-III,” he added.
According to Goldfarb, the company is very comfortable in managing multiple brands. Calvin Klein is approaching a $1 billion wholesale business. “We take it seriously, it’s not a part-time function for anybody.”
He said he’s taken on Tommy Hilfiger, which is profiled to be headed in the same direction of Calvin Klein. “None of these are nonessential pieces,” he said, also mentioning Trump and Lagerfeld. “They’re all very powerful brands and businesses. We have independent management teams.”
Goldfarb spoke about how he was able to propel the Calvin Klein business into a $1 billion wholesale opportunity after taking it over. He explained that previously the better-price sportswear was being manufactured by Kellwood “and it was not very good, and that’s being kind. It bled profusely for Kellwood and Sun Capital. We took it over and today it’s one of the best-performing pieces of business at the retail venues. I would encourage you to speak to the ceo’s of any department store group today and ask them about the performance of Calvin, or Karl Lagerfeld or even the beginnings of what we’re doing with Tommy. I think we’ll get incredibly high marks. We absolutely deliver best-in-class product at the right price and protect the brand,” he said.
Asked whether he thinks G-III will take DKNY down a notch in terms of price point, he said, “Not certain. I hesitate to give you that. It’s just too early for us to respond. The beauty of it is it has so many permutations. It’s a great brand, it’s going to be accepted widely anywhere I take it. There’s virtually no product in men’s. DKNY as a men’s brand has absolutely great, great potential.”
He said there’s no distribution of DKNY women’s or men’s footwear in the U.S. “There’s a mega-opportunity in footwear that doesn’t exist, and then there’s cosmetics, they’ve just unleashed an entire new world for us,” he said. Another opportunity would be DKNY Jeans “which could be explosive for us.
“We know how to do that business. They’ve taken DKNY Jeans off the market for a while, and we can resurrect that tomorrow. The opportunities on the branding side, as well as the improvement on product and expansion of classifications is just unexplored,” Goldfarb said.
Among the products that are already licensed are fragrances (Estée Lauder), sunglasses (Luxottica), hosiery (Hanes) and watches (Fossil). DKNY’s beauty arm, which has been licensed by Estée Lauder since 1997, is made up of a handful of fragrances, such as Cashmere Aura, Liquid Cashmere Black, Liquid Cashmere White, Liquid Cashmere Blush, Cashmere Mist, DK Cashmere, DK Collection Mandarin Neroli, DK Essence Wenge, DK Essence Jasmine, Be Delicious and DK Iris. The group also includes related Cashmere Mist lotion, deodorant and other body-care products. DKNY beauty is sold in more than 120 countries and territories.
According to the terms of the agreement, G-III will fund the $650 million acquisition through new indebtedness, $75 million of newly issued G-III common stock to LVMH, and a $75 million six-and-a-half-year seller note. G-III said it has obtained financing commitments from Barclays and J.P. Morgan Chase Bank N.A. for a $525 million asset-based lending credit facility and a $450 million six-year term loan, which will replace current financing.
For G-III, the acquisition represents its largest one to date. In its two most recent purchases, G.H. Bass & Co. was acquired from PVH Corp. in November 2013 in a $50 million cash transaction, while luxury swimwear brand Vilebrequin was acquired for $106 million in August 2012 from private equity firm Fashion Fund IBV in a combination of cash and unsecured promissory notes due Dec. 31, 2017. The Vilebrequin deal also provided for additional so-called milestone payments, or what is sometime called an earn-out. G-III at the time funded the cash component with an expanded $450 million bank facility.
Thomas Chauvet, an analyst at Citi Research who covers LVMH, said the sale of DKI at over two times sales — the French company’s first significant “disposal” in over a decade — “opens the door to further portfolio simplification.” Chauvet described the sale as “reflecting opportunism and greater capital discipline toward underperforming assets.” He also noted that the brand “no longer fits within LVMH’s portfolio owing to their difficult positioning in the market and high capital requirements.”
Chauvet added that the sale indicates there might be similar moves in LVMH’s fashion and leathergoods divisions. The analyst specifically noted Marc Jacobs as one other possibility, given that the brand, like DKI, is also going through a restructuring. Chauvet said that in Selective Retailing, LVMH might be tempted to sell its duty-free cruise business Miami Cruise, and perhaps also elect not to renew the DFS Hong Kong airport’s concession at the end of 2017. “DFS Hong Kong has suffered from significant revenue and margin pressures over the past couple of years owing to the structural changes of the Hong Kong luxury retail landscape,” the analyst said.
Andrew Jassin, cofounder and managing director of the Jassin Consulting Group, said, “Obviously G-III has proven their ability to be a brand management firm. Their expertise in managing not only their own IP [intellectual property] but other people’s IP has been pretty remarkable.”
He pointed out there are opportunities in a host of areas for the brand such as DKNY Jeans, which has been shuttered. “They’ll have to do a lot of re-branding, particularly for young customers to make it cool again and make it consumer friendly,” he said.
Jassin also pointed to the potential of Donna Karan. “I think Donna Karan is legitimately one of the American iconic brands. That brand on its own has a special place in all the better retail venues,” he said.
Eric Beder of Wunderlich Securities, who said he believes the transaction will “ultimately play to G-III’s strengths,” reiterated his “Buy” rating on G-III, with a price target of $52 a share. “This transformative deal, while dilutive in fiscal year 2018, has the potential, if management can review the Donna Karan and DKNY brands, to be a material winner, which could significantly shift investor perceptions of G-III and create the ability for the company [DKI] to quickly return to prominence,” Beder said.
According to Beder, DKNY sells in major mid-tier department stores and licenses a number of key accessory lines, such as fragrance, sunglasses, watches and intimates. About one-third of sales are international and about one-third from company-owned stores. Beder said, “We also believe that G-III will be much more aggressive in licensing noncore pieces of the business to leading players. Further, the brands will reduce the company’s dependence on outerwear and increase international [volume, a small percent of current sales].”
Harriet Greenberg, an accountant and co-managing partner at Friedman LLP, who is not involved in the transaction, said, “G-III has grown so dramatically since 2012, almost doubling its volume. In this industry, that’s quite something.”
SEC filings list the company’s retail customers at 2,800. Greenberg said the deal is an interesting one for the apparel sector, showing that “larger companies will absorb more of the well-recognized brand names.” Greenberg said the current trend is for licensing companies and manufacturing firms to be the ones accumulating brands because they can take advantage of their economies of scale.
Companies such as G-III “are more sophisticated on distribution, and can weather and control dilution,” she said. Greenberg also noted that retailers such as Macy’s and TJ Maxx, where G-III does a big business, “need G-III, and that means a shift in power.”