A Bold Expansion for Derek Lam By VANESSA O'CONNELL Derek Lam had just crossed the line into fashion stardom—and profitability—when the global economy fell, taking sales of high-priced clothing and accessories with it. The 43-year-old American, who founded his eponymous label in 2003, creates womenswear at the uppermost price tier. A silk jersey sleeveless V-neck dress sells for $1,790. His styles are sold in 124 stores, such as Neiman Marcus and Barneys New York, up from 73 stores in 2005. After turning its first profit in 2007, Derek Lam LLC barely broke even in 2008 and began losing money again this year. To finance growth, the New York fashion house last year sold a majority stake in the company to Labelux Group, a luxury-goods investment group based in Vienna and Milan that owns the footwear business Bally. That financing enabled Mr. Lam and his life partner, CEO Jan Schlottmann, 44, to expand their 45-employee firm. Derek Lam LLC opened its first freestanding store in May in downtown Manhattan—a risky move in the recession. They launched their first ad campaign in glossy fashion magazines last month. This Sunday, the designer, who is also a creative director at Tod's, will join other big labels unveiling spring styles at his first runway show held in Bryant Park, the official venue of New York Fashion Week. In an interview, Mr. Lam and his CEO explained why their recent losses are actually "investments." WSJ: Which moves paid off for you this year? Lam: One of the smartest moves was to open the store. It has given us a whole new platform to present to the whole world all the work I have done. We still have great retail partners: Barneys, Bergdorf's, Saks. But they can only buy within the realm of their floor space and what works for them. To have a store allows me to come in and say, oh, this is what Derek Lam is about. It's an environment that speaks strongly, reinforces the brand, the product range. I really think that direct retail is the way to go. The plan is to open a few more stores. WSJ: Why? Lam: You capitalize on it as a laboratory. I am in the store almost every afternoon. What are people gravitating towards? What are people saying in terms of the clothing? How does it fit? Does the architecture and the clothing and the product feel like it is cohesive? I don't know many New York fashion designers who have that opportunity, because of the neighborhood or the square footage you need. But this was something very important to me. That you could pass by your own window and say, OK, I am satisfied. Or I am not. Or this is something we can capitalize on! See the sales numbers? WSJ: What would you have done differently this year? Lam: There was the question about whether or not we should be on Madison Avenue, which is a high-traffic luxury street, or to be downtown, Crosby Street, on an unknown corner that is my favorite corner in terms of New York. I said, "We are not going to have our headquarters on Madison Avenue. It is impossible, in terms of having the store and the company offices above. This is our laboratory." Whether we would be generating more business in a high-traffic-expected location is up for evaluation. But we send a lot of clothes uptown. WSJ: What are you doing now? Lam: We are definitely scaling back, in terms of the amount of advertising we wanted to do or opening more stores right off the bat. We originally planned to open two stores. And we said we really need to see how this works before we jump in. Advertising, there was a question. Should we wait because of the economy? Should we do it? We said let's take advantage of the fact that maybe the magazines are smaller. Your ad doesn't get lost. Contrary to what other people would say—that it's a bad time to advertise—it is setting a foundation. In the recession, we are finding that vendors, contractors, are more open to somebody coming in who is new and enthusiastic, as opposed to when everything is big dollars, big scale, and you're lower on the totem pole. We can take that to our advantage. That also helps with costs. If we need a faster delivery because we want to fill a reorder, before it was kind of, 'Oh no, there's a long lead time and we are not going to be able to slot you in.' Now they are a little bit more open. We take advantage of that. WSJ: How did the downturn and the credit crisis affect your firm? Lam: We were scared, definitely, because our goal is to always deliver merchandise to stores very early. When Jan and I started, a friend told me inventory will kill you. Inventory that is in your warehouse is going to kill you. You just need to get it out there. It will be overwhelming if you don't. For us, we are weighing the balance and the risks. But there are people shopping still. In smaller numbers, but slowly and surely we are seeing it. Schlottmann: We are seeing a great improvement in fall. Spring was really tough. Resort and spring were tough, not good. WSJ: What are people buying? Lam: Jersey dresses have been doing amazing. Our top three best sellers are draped jersey dresses. I am always looking for what is the next new thing in jersey. It's the miracle fabric. I think it speaks very much for now. It's body-conscious but also has some softness. It is feminine, easy to wear. It fits a lot of body types. It started with people wearing jersey tops in a bootleg jean and now it has almost turned into an all-jersey wardrobe. So jersey is a big thing for us. Coats we have always loved. I think that is one of the things that is kind of nonsensical. Why do you need a new winter coat? But I think coats, especially in the Northeast, when people are out in the street, it is a huge wardrobe refreshener.