Designer Holdings Hunting for a New Licensing Deal

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By Suzanne Kapner
Staff Reporter

Designer Holdings

(DSH)

may have some kick left in its stride.

While some money managers have abandoned the stock as another designer-label play gone awry, several analysts and money managers say it will move higher if the company signs another licensing agreement. And according to President and Chief Executive Arnold Simon, Designer Holdings is on the verge of sealing a deal.

"It would make sense for us to buy back stock," says Simon, pointing to the depressed share price. (At 7 7/8, the stock is trading at 0.54 times sales.) "But we're not doing that on the basis that we're saving money for acquisitions and licensing deals."

Simon says he is in talks with several players. "It's not feelers," he says. "It's further than feelers. We're negotiating with a group of different deals. It's up to us what direction we take."

In April the company received a commitment letter from

NationsBank

(NB)

for a $200 million line of credit, which Simon says will be used primarily for acquisitions.

Still, Designer Holdings is no stranger to disappointing the Street, having warned analysts that this year's profit will fall short of previous expectations thanks to the collapse of a

Donna Karan

(DK) - Get Report

licensing deal and reduced distribution of

Calvin Klein

jeans, khakis and sportswear lines. Money managers, torched when Designer Holdings stock skidded 56% from its initial public offering price of 18 last May, want more than talk.

Chris Fox, portfolio manager of

Schaenen Fox Capital Management

, a New York hedge fund, says the stock will rise if Designer Holdings signs a licensing agreement. But he has sold all his shares in recent weeks and is not buying more. Similarly, Randall Haase, portfolio manager of the $265 million

Alliance Quasar Fund

(QUASX) - Get Report

, says he sold his entire position in Designer Holdings. The $2.8 billion

Acorn Fund

(ACRNX) - Get Report

did the same, according to spokeswoman Merrillyn Kosier.

Some institutional investors are hanging onto their shares. "They beat first-quarter estimates," says Stephanie Hoff, an analyst with

Kennedy Capital Management

, a St. Louis institutional holder of 166,000 shares. "It's a cheap stock. Given that they'll earn between 90 and 95 cents this year, it doesn't make sense to sell."

Those who still own shares are getting a more organized and profitable company than the Designer Holdings that first began distributing Calvin Klein jeans in August 1994. That year the label was grossing the firm $50 million in sales. Last year the brand rang up a whopping $475 million in revenue.

"It was like the Wild West around here," says Simon of the company's growth.

He blames that tumultuous expansion for a problem that has sliced Designer Holdings' current earnings. Several of the company's specialty retail customers were reselling the jeans and activewear to off-price stores -- in effect creating a black market for the goods. That type of diversion dilutes a brand by eroding its exclusivity. If customers can buy CK jeans in

Costco

(COST:Nasdaq), why pay twice as much in a department store?

Designer Holdings announced in March that it was cutting off those specialty stores guilty of reselling the product -- a move that will reduce earnings in the short term but should help the business in the long run. The 1997 revenue hit will be $50 million, Simon says.

While that tactic protects future business by bolstering sales at Designer Holdings' bread-and-butter department store clients, some money managers questioned why it took the company two years to address the problem.

Simon says it took time to tag merchandise so diverted goods could be traced back to the original retailer. Today, Designer Holdings marks each item with

CIA

-like invisible ink. "Now if a pair of jeans show up in Costco, we know exactly where they came from," Simon says.

In an effort to sell more full-price merchandise, the company also cut off $35 million in discounted sales to South America. Instead, Designer Holdings collects a royalty fee, which drops straight to the bottom line, of about $4 million on goods sold in that continent.

Also, the company has tightened control of its khaki division, which does about $54 million in sales. Last year, Designer Holdings filled only half of its khaki orders because of screw-ups at its overseas factories, says a company employee who asked not to be identified. Today, the company's manufacturing is primarily domestic. And the employee says the khaki business is shipping on schedule.

Simon, who confirmed problems with the khaki division, says cost-cutting initiatives in that and other divisions should improve margins by 1% this year.