Designer Holdings Looking to Get Phat

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By Suzanne Kapner
Staff Reporter

With pressure mounting to sign a licensing deal in the wake of its fiasco with

Donna Karan

(DK) - Get Report

,

Designer Holdings

(DSH)

is talking to

Phat Fashions

, a line of hip-hop clothing founded by rap music magnate Russell Simmons, two people familiar with the situation say.

But the deal, if it is sealed, is not likely to kick DSH out of its Wall Street doldrums. The stock's been languishing since its contract to make jeans for Donna Karan fell through in March. The two New York companies disagreed over production schedules, as well as the amount and type of clothes produced. Donna Karan, which trades around 11, also has suffered from the blow-up and has since refunded about $7 million to Designer Holdings.

While lacking DK's fashion stature, New York-based Phat, and particularly Simmons, is a force in the entertainment world. Simmons started the company in 1992 to take the urban hip-hop craze mainstream.

Polygram N.V.

(PLG) - Get Report

, the giant music conglomerate, is an investor in Simmons' company

Rush Communications

, which is the parent of Phat Fashions,

Def Jam Music Group

,

Artist Management

and

SLBG Entertainment

.

But on Wall Street, Phat Fashions -- named for the rapper slang meaning cool or big -- is relatively unknown. None of the financial experts interviewed for this article had heard of the company. And with only one store -- in New York's trendy SoHo, under the name

Phat Farm

-- and distribution in a smattering of small boutiques around the world, it's far from a powerhouse brand. It has yet to gain wide entry into the lucrative department store venue.

And that's got DSH watchers worried. Kurt Barnard, of

Barnard Retail Consulting Group

in Scotch Plains, N.J., is skeptical of Designer Holdings' business acumen. "They've disappointed a lot of investors," he says. "The question is, how good is their judgment?"

Chris Fox, of New York hedge fund

Schaenen Fox Capital Management

, says he is keeping his eye on DSH's next partner. His firm owned shares of the company but has sold them. "I'd buy again if they did a deal that I thought was good," he says. "Ultimately what's important is if it's a good financial transaction for them. But there would be some modest disappointment if it's not a big name."

Phat might be a bigger name soon. Other small, upstart hip-hop brands like

Mecca

and

Porn Star

lately have managed to grab some market share from the likes of

Tommy Hilfiger

(TOM)

, perhaps the best-known purveyor of urban chic to suburbia. And Phat may soon have a foot in the department store door. One industry insider says the company is negotiating with

Macy's Herald Square

in New York for space.

Some stockholders are happy for whatever bone DSH can throw them.

"Anything in the wake of Donna Karan would be a help," says Stephanie Hoff, an analyst with

Kennedy Capital Management

in St. Louis. The firm owned 166,000 shares of DSH as of March 31, the latest data available from

Technimetrics

. "With an unknown designer you won't have the same power struggle" that Designer Holdings had with Donna Karan, she says. "DSH could bring more muscle to the bargaining table."

Neither Designer Holdings nor closely held Phat Fashions would comment on the talks. But in an

interview with

The Street

several months ago, Designer Holdings President and Chief Executive Arnold Simon said his company was talking to several possible partners and was close to signing a deal.

DSH will need all the muscle it can muster to lift its stock from around 9, where it has languished since the DK deal fell through. The stock had traded as high as 34 soon after going public at $18 a share in May 1996.