After only three years in business, designer Derek Lam seems well down the road to high-fashion stardom.

He's a darling of influential fashion publications such as Vogue and Women's Wear Daily. In June, he won a prestigious award for new designers. Celebrities such as actresses Hilary Swank and Natalie Portman and First Daughter Barbara Bush don his luxurious silk and cashmere clothes. Influential retailers from Barneys New York to Neiman Marcus to Saks Fifth Avenue stock his creations.

But despite his glamorous, downtown New York image, he is still struggling to make a buck. He and his business partner, Jan-Hendrik Schlottmann, who are both 39 years old, draw no salary. They live in a one-bedroom apartment off income-tax refunds from their company's losses. Mr. Lam's eight full-time employees work at below-market rates, as does his publicist. At his runway show Friday, on the last day of New York's Fashion Week, models will be paid in clothes rather than money, and sponsors such as crystal maker Swarovski and cosmetic firm Shiseido will pick up the tab for hairstylists and makeup artists.

Mr. Lam has built a $4.8 million-a-year business but it has yet to reach the critical mass necessary to operate profitably and efficiently. Derek Lam Co. will lose money this year, as it has every year since it was formed in 2002, although Mr. Schlottmann declines to say how much.

Mr. Lam is part of a new generation of rising fashion stars struggling to follow the path to financial success blazed by American fashion icons such as Donna Karan, Calvin Klein, Oscar de la Renta, and Bill Blass. Handicapped by broad changes in retailing and manufacturing, these young designers are finding it difficult to capitalize on industry acclaim and turn a healthy profit.

Consolidation of the retail industry, coupled with the shifting merchandise preferences of department stores, is only part of the problem. The rise of the euro against the dollar has made it far more costly for American designers to rely on Italian manufacturers long favored by the fashion elite.

Together with Mr. Lam, designers such as Zac Posen, Proenza Schouler, Peter Som and Behnaz Sarafpour have been labeled the new Young Turks of fashion. They appear in fashion magazines, dress movie stars, and enjoy a following among trendy shoppers. But few of them are making any money and it will be difficult for some to ever turn a profit.

"This is a big talented group of high-end designers. They are meant to be the best of the best. But it remains a problem -- how are they going to move forward," says Peter Arnold, former director of the Council of Fashion Designers of America, the industry trade group that awarded Mr. Lam its emerging talent award. "I just don't think there is room enough for most of them to make it."

When Donna Karan launched her business in 1985, she too won acclaim for her expensive, Italian-made fashions. But she had more retail options. Pace-setting independent boutiques such as Martha and Charivari in New York were flourishing. Mainstream department stores such as Bloomingdale's carried expensive designer fashions in hundreds of their branches. Store buyers were eager to generate buzz by stocking high-end fashion.

With a broad revenue base, Ms. Karan was able to expand within four years. In 1989, she rolled out DKNY, a mid-priced women's sportswear line, to hundreds of department stores. DKNY became the cash cow that enabled Ms. Karan to move into menswear, accessories, cosmetics and factory outlet stores. In 1996, when Donna Karan International went public on the New York Stock Exchange, the company had sales of more than $510 million.

Since then, the retail landscape has changed dramatically. Mergers and store closures have significantly reduced the number of department-store outlets. As the remaining stores concentrated on boosting their bottom lines, buyers cut back on high-end design apparel, limiting such merchandise to a few big-city showcases.

Tony independent boutiques went out of business. Intense competition from cheaper fashion stores such as H&M and Zara, which didn't exist in the U.S. a decade ago, has further limited the market for upscale fashion.

In the 1980s, "there were so many independent specialty stores and department stores were run differently," recalls Robert Duffy, business partner of designer Marc Jacobs. "They had the power to support a designer." Saks Fifth Avenue carried Mr. Jacobs's collection in 20 branches in his second season in 1983, he says. "Now, retailers wouldn't take that kind of chance."

Mr. Lam has to make do with far less exposure in American department stores: three Saks and three Neiman stores. His four Barneys locations are his best customers. With limited big-store distribution, he has had to look abroad. Fifty-five of the 120 stores that carry his goods are not in the U.S.

An explosion in the number of designer labels is also squeezing new brands. "It's really crowded out there, and you realize, how big are these businesses ever going to get? $10 million? $20 million?" asks Mr. Arnold, the former CFDA director. And if newcomers do not reach a critical mass, he explains, it is difficult for them to cut lucrative licensing deals with other companies to produce accessories such as branded perfumes, belts, handbags.

Mr. Jacobs and Michael Kors, who are now among New York most established designers, struggled during the 1980s and 1990s until backers swooped in to stabilize their businesses. LVMH Moet Hennessy Louis Vuitton took control of Mr. Jacobs's company in 1997 and helped him launch a mid-priced department store apparel collection. Silas Chou and Lawrence Stroll, former backers of Tommy Hilfiger, took control of Michael Kors Inc. in 2003, enabling it to introduce to do the same.

"Marc (Jacobs) and I were the last generation who could grow on our own. We just squeaked in," says Mr. Duffy, his partner. Before LVMH arrived, he recalls, Mr. Jacobs consulted for companies such as Iceberg, a fashion brand. "Marc and I have always worked two jobs," Mr. Duffy says.

Mr. Lam has started to move in that direction. Last year, he agreed to design a ten-piece apparel collection for Tod's, an upscale Italian footwear and accessories company. The line will reach Tod's stores in the spring.

Mr. Lam's reliance on Italian manufacturing has turned into another source of fiscal pain. High-end designers have always insisted on manufacturing in Italy, the home of Prada, Gucci and Armani, renowned for its superior craftsmanship. But the strength of the euro has made Italian fabric and labor more expensive.

Many less upscale designers have turned to low-cost countries such as China. Over the past year or so, American designers who have continued to produce in Italy have had to raise prices by as much as 30 percent.

Mr. Lam's early career path was typical. Raised in San Francisco, he was exposed to the fashion business by his Chinese-American parents, who ran an import-export concern selling clothes and antique furniture. He graduated from Parsons School of Design in New York in 1990, then worked for 12 years as an assistant to designers Geoffrey Beene and Michael Kors in New York. After forging a strong relationship with an apparel factory and a pattern maker in Italy, he decided to go out on his own.

Mr. Lam and Mr. Schlottmann, who had worked in cosmetics marketing at Prada Group, scraped together $450,000, using savings from their previous jobs and the sale of Mr. Schlottmann's Paris apartment. In 2002, they founded the fashion house, renting a $2,500-a- month, 1,000-square-foot studio in the trendy meatpacking district of Manhattan.

Mr. Lam had soured on the world of $200 sportswear when he designed a now-defunct lower-priced line for Mr. Kors. He hadn't liked having to simplify the designs and using cheaper fabrics. So he decided to start with high-end apparel, which is how Ms. Karan, Mr. de la Renta and Mr. Blass made their names.

Mr. Lam's name started to catch on as well. "He delivers the best quality and fit and has lots of good stand-alone pieces, and that's what keeps customers coming back, says Julie Gilhart, fashion director at Barneys.

But as the euro soared, so did U.S. prices for Mr. Lam's clothes, reaching $1,500 for a dress and $1,390 for a velvet jacket. Retailers say there's a limit to how much they can buy and sell from Mr. Lam and his contemporaries at such prices.

Mr. Lam's high costs also affected standard items such as pants and sweaters, an important moneymaker for many designers. The basic poplin pants in his first collection cost $495. He sold only 15 pairs, Mr. Schlottmann says.

That made it tough to achieve economies of scale. When a designer orders thousands of garments, production costs fall. Mr. Lam typically designs about 120 styles each season but makes no more than 180 of any one item. "You can't make money when you are making in the hundreds. You have to make them in the thousands," says Arnold Cohen, a partner in Mahoney Cohen, a leading accounting firm for fashion companies.

Mr. Lam is sometimes forced to shave the price of certain items by 10 percent to 30 percent, cutting into profits, to keep his retail price in line with comparable labels such as Prada, Yves St. Laurent and Giorgio Armani.

The cost of making sample garments, which Mr. Lam needs to show to magazines and retail buyers, has become so expensive that Mr. Lam can only afford to make two per style, fewer than the six or more typically used by established designers. Years ago, up-and-coming designers could get away with this. Today, the proliferation of fashion publications, Web sites, catalogs, trunk shows and retailers makes generating publicity a bigger job. Mr. Lam must shuttle his limited number of samples across America and Europe at great expense. He spent $1,000 on local messengers and $5,000 on overnight couriers in June alone.

In recent years, other New York startups such as Tracy Reese, Milly and Lafayette 148 have taken aim at the burgeoning market of "contemporary" designer apparel priced under $400, made cheaply in countries such as India and China. Although they don't get the same industry awards and editorial adulation, these companies have grown into profitable businesses.

A couple of financiers and licensors have talked to Mr. Lam about introducing a lower priced line but so far he says he doesn't yet have the name-recognition to warrant such a move. He worries that shifting production out of Italy would compromise quality and on-time delivery.

Mr. Lam argues that his high-end strategy makes better use of international markets, which account for nearly half his sales. "I'm developing a brand that is special and unique for a global market," he says.

Mr. Lam says his company is on track to break even next year. Most of today's prominent young designers are also trying to figure out how to survive for the long term.

"Out of all the 15 or so young designers, there will probably be just one that will make it and become a big name," says Mr. Chou, the former financial backer of Mr. Hilfiger who now backs Michael Kors.

Fashion house Proenza Schouler, Messrs. Posen and Som, and Ms. Sarafpour, while celebrated in the fashion press, have all been struggling to generate enough sales to cover overhead and invest for the future. While most have sales well under $10 million, they are all adamant about maintaining their high-end image, even if it means missing out on some lucrative revenue streams.

Ms. Sarafpour, for example, says she recently turned down the chance to do T-shirts and jeans that could have added some cash to her three-year-old company.

Mr. Som, who hopes his six-year-old company will break even for the first time this year, says he is willing to explore some commercial alternatives that "aren't at the luxury price point ... I'm not going to be one to sniff at (designing) something for Target."

This new crop of designers will have to be more creative about financial options if they hope to survive, industry insiders contend. Mr. Arnold, the former CFDA director, says their options include giving up some equity in exchange for financial backing, and creating lower-priced lines.

Mr. Kors, who sold control of his business in 2002, says there's no one sure path for today's developing designers. But he warns: "If you don't have outside money, the road is 20 times as long."

Mr. Lam and his partner say they've accepted the new realities of high-end fashion and harbor no dreams of becoming a conglomerate like Calvin Klein Inc. "A really good artisan can't mass produce," says Mr. Schlottmann. "And you aren't going to get rich."