Donna Karan isn't a movie star. But she dresses them on TV ... and in the movies ... and at the

Oscars

.

The doyenne of design has gone so far as to spend in excess of $1 million on a 128-page advertising supplement to the current issue of

Vanity Fair

to curry favor with Hollywood. That's not small change considering

Donna Karan International

(DK) - Get Report

is expected to rack up its second consecutive year of fat losses -- quite a performance for a company that's been public for only three years.

Despite the designer's penchant for glamor, investors are pushing DK shares to discount prices. Since July, the stock has slipped 63.1% to 5 3/4, where it closed Monday.

That's quite a dressing down for a woman who was included in

Vanity Fair's

November issue saluting America's 200 most successful women. But then, the bottom line is rarely a criterion used to measure fashion clout.

"To say you can take creativity and make a business out of it, that's almost an oxymoron," says Elliott Ettenberg, chairman and chief executive of

Customer Strategies

, a marketing company.

That hasn't kept investors from getting starstruck over Donna Karan. Just last summer, the shares traded as high as 16 on the belief that John Idol, DK's chief nipper and tucker whom Karan wooed from

Polo Ralph Lauren

(RL) - Get Report

, was tailoring a seamless turnaround.

Idol took the CEO reins in July 1997 from Karan, who is now chairman and chief designer. He soon set in play a cost-cutting plan that, coupled with lucrative licensing agreements, was intended to place DK in the black for the most recent year.

But a thread popped in December when a planned licensing agreement -- expected to add $5 million to the company's coffers in the fourth quarter -- unraveled. As a result, the

First Call

1998 consensus fell to a loss of 13 cents per share from a profit of 32 cents per share. The company will report March 23.

Then, Idol's absence from the

Seventh on Sixth

fashion shows in February fueled talk that he was looking for a new job, which he denies. Says Idol, "I have a five-year contract with

the company. I love working with Donna. I'm not going anywhere."

Not as much can be said for general counsel David Bressman, who recently resigned "for personal reasons," a company spokeswoman says. Bressman couldn't be reached for comment.

Despite these recent hiccups, Idol says his plan to turn the company around is on track. To his credit, Idol has stemmed DK's operating loss from an astounding $91.3 million last year. And he accomplished this at a time when many apparel manufacturers stumbled. Anemic traffic at department stores relative to specialty stores has left some manufacturers with bloated inventory. And department stores, in a defensive move, have been relying on fewer marquee names to guarantee sales.

"I feel very strongly that, over the next 24 months, we'll have the kind of returns that will get people excited about this company," Idol says.

So far his plans have drawn mild success and much criticism. They include stimulating demand for

DKNY

, a label which falls just below the company's collection lines, in department stores by cutting prices; building brand awareness by opening specialty stores; and signing more licensing deals.

Price cutting is a tricky approach because it could tarnish the brand's appeal. So far the strategy appears to be working, according to several retailers, who say they are enthused by the spring 1999 DKNY men's line, which is selling at a 35% discount to previous prices. Women's DKNY will follow at a 17% reduction.

Idol says he's able to keep quality and margins constant despite the lower prices because the company is using fewer factories, which, in turn, are giving the company volume discounts.

Perhaps Idol's most ambitious and controversial project to date is to expand DK's specialty store presence. The company most recently bought back three stores in the United Kingdom from licensees. And Karan is getting behind the push by agreeing to finance a flagship store on New York's Madison Avenue herself.

The strategy has drawn criticism from some fashion insiders, who point out that flagship stores, while useful for brand building, are typically money pits.

Not his stores, says Idol, insisting they will be models (albeit supermodels) of fiscal responsibility. He says the DKNY flagship store in London is profitable, although he admits the

Donna Karan Collection

store in the U.K. is running at a loss.

"We won't be opening any future stores that aren't profitable," he says.

Finally, there are the all-important licensing agreements. The company has licensed everything from fragrance and jeans to hosiery and eyewear. Analysts applaud the strategy, because it lets DK expand into new product categories while avoiding start-up costs. In that way, most of the revenue, typically about 5% of sales on licensing deals, drops straight to the bottom line.

The strategy works best for areas outside a company's core expertise. For instance, DK lost roughly $100 million in an attempt to develop a beauty brand in-house before agreeing to license its name to

Estee Lauder

(EL) - Get Report

.

But in licensing jeans and activewear to

Liz Claiborne

(LIZ)

, critics say that DK gave away its future growth vehicle. They point to

Tommy Hilfiger

(TOM)

, which recently boosted its earnings growth by buying back its jeans licensee.

DKNY Jeans, which launched last year, and DKNY Activewear, which is scheduled to hit stores this spring, are bright spots for Liz Claiborne. Jennifer Black, an analyst with

Black & Co.

, says the jeans business generated roughly $70 million in U.S. sales its first year and expects growth of 70% this year. Black doesn't follow Donna Karan.

"I know people are concerned that it's cannibalizing our existing business," Idol says. He adds that, in reality, the overlap is limited. For instance, the company's own DKNY merchandise is in only three

Macy's East

stores, while Liz Clairborne's DKNY Jeans will be in 50 stores. Macy's East is a

Federated Department Stores

(FD)

unit.

No matter how much attention Idol pays to the bottom line, the company will still be subject to the whims of its founder. Take the

Vanity Fair

insert -- the largest advertising supplement ever purchased in a U.S. consumer magazine -- which comes at a time when investors are finding holes in their DK pockets.

"It opens a Pandora's box in how they spend money," says a person familiar with the company.

And that's not likely to sit well with investors, who, unlike movie stars, have to pay for their piece of the Donna Karan name.