A Partnership Made in Heaven.(Dolce and Gabbana)

Inside the new Dolce & Gabbana store on Milan's fashionable Corso Venezia, a group of trendy twentysomethings sit around a sleek cafe, throwing back espresso. Across the hall, a Sicilian barber gives a dapper businessman a quick trim in a neo-deco shop. Oh, yes, and there are racks of sharp pinstripe suits, straw linen blazers and alligator loafers, too. Lifestyle-theme stores have been popular in fashion retailing for a decade or so, but Dolce & Gabbana really upped the ante last month when it opened its three-story menswear emporium in a 19th- century Milan palazzo, replete with polished walnut armoires, rococo inlaid parquet and black Murano glass chandeliers. "We want it to be a place where people can come together, not just to shop," says designer Domenico Dolce, who with his domestic and business partner, Stefano Gabbana, runs the 20-year-old company.

But the emporium's visitors are shopping--a lot. While most of the luxury industry is in the economic doldrums, Dolce & Gabbana is thriving. Last year, as its competitors scaled back forecasts, the company posted a 41 percent increase in revenues, to 445 million euros. In addition to the men's store, the company recently opened a dozen new boutiques in Japan and is renovating two shops in Milan--for its accessories and its vintage collections. This spring it will inaugurate a store in Munich, its first in Germany. Last fall the company moved into its new state-of-the-art headquarters in Milan, a sprawling seven- floor office with black lava-stone floors straight from Mount Etna and glass walls that afford striking views of the baroque city.

Besides selling its own products well, Dolce & Gabbana is influencing fashion across the board. This winter, companies such as H&M, the Gap and Zara have all imitated Dolce & Gabbana's rough-hewn woolens and rustic furs. And the pair's fall-winter 2003-04 womenswear collection, to be shown in Milan next week, will no doubt set copyists, retailers and magazine editors scribbling. "Dolce & Gabbana have been one of the trend leaders in fashion for some time now," says Tom Julian, a trend analyst for Fallon Worldwide. "Everyone copied their shearlings, their flower prints, their worn leathers and suede. For such a small company, they are really an international powerhouse."

Dolce & Gabbana has always thought small and intimate, which is what makes the company a jewel in luxury's treasure chest. The pair launched their personal and professional relationship in the early '80s: Dolce, 19, was the son of a Sicilian tailor and a fashion-school dropout; Gabbana was a 23-year-old graphic-design student from Milan who didn't want to pursue graphic design. Instead, they scraped together 2 million lire (about $1,000) to start their company, and made their debut in the 1984 New Talents show in Milan. They had two role models: "Coco Chanel for structure of the house," says Gabbana, "and Giorgio Armani for focus."

They turned to Anna Magnani, ...