MC Lvmh Moet Hennessy Louis Vuitton SE

By Saabira Chaudhuri 

LVMH Moët Hennessy Louis Vuitton SE agreed to sell Donna Karan International Inc. to apparel company G-III Apparel Group Ltd. for $650 million including debt, an unusual retreat for the French luxury giant.

The Donna Karan and DKNY lines delivered lackluster growth for years amid stiff competition and capped investment from LVMH, which focused more on its eponymous brand, Céline and other labels it saw as being higher potential.

About two years ago LVMH decided to restructure Donna Karan, cutting costs and simplifying the branding. During its latest effort at the end 2015, the French company pulled lines like DK Jeans and DKNYC in a bid to focus on the brand's core collections. The Donna Karan line has remained suspended since last summer when the brand's eponymous founder resigned.

In an interview, LVMH Fashion Group Chairman Pierre-Yves Roussel said the moves had begun to pay off, but that energizing the DKNY brand was a journey that would have taken time.

When G-III Chief Executive Morris Goldfarb expressed interest in buying Donna Karan about six weeks ago, LVMH decided to sell, its first divestiture of a big brand since 2005. LVMH and New York-based G-III didn't break out details of the price tag, giving only the $650 million "enterprise value."

"We knew the potential for reenergizing the brand would be around a business model that is probably more suited for G-III than for us," said Mr. Roussel. He said DKNY was slated for broader, wholesale distribution at a more accessible price point, while LVMH tends to sell its brands at higher prices through its own stores.

The deal is expected to close in late 2016 or early 2017.

LVMH, which owns a bevy of brands including flagship fashion label Louis Vuitton, champagne house Moët & Chandon and cognac label Hennessy, bought Donna Karan in 2002 for about $243 million.

Founded in 1984 by American designer Donna Karan, the brand's clothes, shoes and bags quickly gained in popularity. The company went public 12 years later.

Donna Karan was the first major American designer label for LVMH. It was also the biggest foray into the ready-to-wear apparel business by the company's founder, French fashion mogul Bernard Arnault. The brand's ubiquitous presence in department stores didn't square perfectly with LVMH's ultraluxury image, but Mr. Arnault snapped it up on the grounds that it was one of the world's best-known brands.

Monday's sale is a stark departure for LVMH, where Mr. Arnault has built a reputation for sticking with the brands he has purchased over the firm's nearly 30 years. The last time Mr. Arnault parted ways with a major brand was in 2005, when LVMH sold Christian Lacroix to the Falic Group, a U.S. duty-free-store operator. Christian Lacroix eventually filed for bankruptcy after Falic failed to find a buyer for it and was unable to stem mounting losses at the brand.

Citigroup analyst Thomas Chauvet said Monday's sale could indicate LVMH is open to selling other brands, like Marc Jacobs, which he has highlighted as an underperformer. LVMH declined to comment. Mr. Arnault has previously suggested LVMH could spin off and publicly list the brand -- 80% of which is owned by LVMH, 10% by designer Marc Jacobs and 10% by Mr. Jacobs's business partner Robert Duffy -- once it begins growing more strongly.

Mr. Roussel said Marc Jacobs is "a very different story" to Donna Karan since LVMH has long been in control of the brand and Marc Jacobs has "always done well." Still, he said "we think it could be doing much better."

The company is working to subsume the Marc by Marc Jacobs brand into the Marc Jacobs brand -- combing shows, stores and marketing campaigns. Mr. Roussel said directing spending toward one brand rather than two, would allow Marc Jacobs to grow more quickly.

Mr. Chauvet, of Citigroup, said the Donna Karan sale aligns with his view "that the brand no longer fits within LVMH's portfolio owing to their difficult positioning in the market and high capital requirements." He estimated that LVMH's efforts to reposition and invest in Donna Karan and Marc Jacobs had cost the company EUR116 million ($127 million) in operating losses in fiscal 2015.

G-III, which makes licensed apparel for brands such as Calvin Klein, said it saw a significant market opportunity for Donna Karan. "Donna Karan brings increased scale and diversification, while providing incremental growth on top of our portfolio of some of the best fashion brands in the world," said Mr. Goldfarb.

The U.S.-based company expects the deal to be dilutive to earnings in fiscal 2018 and to add to earnings thereafter. Citigroup said the divestiture is "largely immaterial" to LVMH's group earnings.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

July 26, 2016 02:49 ET (06:49 GMT)

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