Fool.com: Donna Karan Carryin' On (News) November 3, 1999

Donna Karan Carryin' On

By Dave Marino-Nachison (TMF Braden)
November 3, 1999

Men's and women's apparel designer Donna Karan International (NYSE: DK) today announced a set of cost-cutting measures it hopes will help bolster profits in the face of troublesome expense growth.

The planned moves include consolidating the upscale Donna Karan New York and more-democratic DKNY women's divisions into one business unit -- Donna Karan New York Women's Collection President Susan Sokol is leaving as a result -- combining the public relations and creative service departments to unite marketing with publicity and closing seven outlet stores.

The company's moves will mean 175 job cuts representing about 8% of Donna Karan's total workforce and approximately $11 million in one-time charges in the fourth quarter. Donna Karan hopes to get annual savings of approximately $6 million in return; selling, general and administrative expenses were just over $152 million last year.

"We are on track to achieve our 1999 financial targets, which are a significant improvement from last year," said CEO John Idol, brought in from Polo Ralph Lauren (NYSE: RL) in 1997 to get the company's finances and operations in order. He's already taken Donna Karan through one major restructuring. "Nevertheless, we must continue to create efficiencies and increase operating margins. We believe that these new initiatives will streamline operations and reduce infrastructure costs in our wholesale segment."

"In our retail segment," Idol continued, "while we are expanding our DKNY full price retail program, we are also closing certain of our least profitable outlet stores." That step has been contemplated some time as same-store sales at the division haven't been particularly impressive. "We are continuing to refine the outlet merchandise selection and store format in the remaining stores to increase productivity and return the outlet division to profitability in the future."

Fashion brands can do as much to provide investors with headaches as they can to improve one's standing in the chapter house/boardroom/nightclub. In order to maintain momentum, companies like Donna Karan need not only to continually develop fashions and other items in step with the times but generate operating profits in the face of the immense costs of generating buzz and maintaining a fashionable image.

Donna Karan has found this difficult going in the past but appears to be making progress finding price points for its lines that, while lower than it might like, have probably made it more accessible to consumers. Still, for the first six months of 1999, selling, general and administrative expenses rose to represent 31.5% of revenue from 24.1% in 1998, offsetting improved gross margins.

Simply put, fashion isn't an easy business: even the most dynamic names like Polo and Tommy Hilfiger (NYSE: TOM) are not infallible. Investors who've been following Donna Karan might remember that just about seven months after the Fool suggested that the company looked "stylin'" in a column last year it was back on the Trouble racks.

Nevertheless, Donna Karan is still seen finishing the year well above the profit level: third-quarter results, expected soon, are key as it's generally the company's biggest period. The stock has been creeping upward this year but investors have been wary of riding it too high and it may be they've wearied of restructuring announcements.

Related Links:
Donna Karan Message Board
Daily Trouble, 12/4/98, Donna Karan
Fool Plate Special, 5/5/98: "Donna Karan Stylin'"

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