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Proenza Schouler Founders Buy Company Back in Major Shakeup

Designers Jack McCollough and Lazaro Hernandez have bought out private equity firm Castanea Partners with the support of private investors, installing a turnaround specialist as chief executive to revive the flagging brand’s fortunes.
Lazaro Hernandez and Jack McCollough | Source: Danny Weiss

NEW YORK, United StatesProenza Schouler founders Jack McCollough and Lazaro Hernandez have bought out private equity firm Castanea Partners with the support of a new group of unidentified investors, according to the company.

The exit of Boston-based Castanea, which purchased a minority stake in the label in 2015, comes alongside a major shakeup in the executive ranks. CEO Judd Crane and CFO John Paolicelli are out, with turnaround specialist Kay Hong stepping into the chief executive role. The acquisition includes an injection of capital to help fuel future growth, however, the company did not indicate how much money has been raised.

Most recently, Hong served as chief executive of plus-size fashion chain Torrid and was previously managing director in the turnaround and restructuring division at global firm Alvarez & Marsal, where she specialised in "interim management for retail companies in distress as well as leading performance improvement initiatives for financially healthy companies, " according to her bio.

Like many independent fashion businesses attempting to compete against major luxury groups in the new retail reality, Proenza Schouler has hit some roadblocks since it first saw commercial success with the launch of its PS1 handbag in 2008. As sales of that cash cow slowed, the company also faced the rise of knock-off happy fast fashion, which took a particular liking to the brand's designs and made it more difficult to sell its high-end fashion at full price.

Recently, they closed their store on the Upper East Side and four stores in Asia operated in partnership with Club 21, as well as a second store in Bangkok. "We don't have this huge conglomerate behind us funding expansion, so we just can't plop down $5 million to open a store in Paris," Hernandez told BoF in September 2018. "As the company grows and we have the financial capabilities of opening more direct-to-consumer locations, that's definitely something we want to do, but there are no immediate plans."

Proenza Schouler has never shared revenue figures, and while a report in WWD estimated annual sales to be $85 million in 2015, a person familiar with the company’s balance sheet said the business is smaller than that.

To support Hong's efforts, Mary Wang, who spent 20 years at Donna Karan before leading global operations at Alexander Wang — of no relation — is joining as COO, while Jonathan Friedman is stepping in as interim CFO. (Friedman was previously the CFO of Ippolita, another Castanea portfolio company that was bought back by its founder this year.)

Proenza Schouler has also elected a new board of directors "with significant industry and financial expertise," but did not disclose their identities. As of 2015, the company's board included Theory chief executive Andrew Rosen, Castanea managing partners Ron Frasch and Brian Knez, Irving Place Capital chief executive John Howard and former Burberry chief executive Rose Marie Bravo. .

In a joint statement, McCollough and Hernandez said that they "couldn't be happier" with the change in leadership, indicating that ownership would allow them to have "full authority over our company’s destiny.

From 2007 to 2011, Proenza Schouler was minority-owned by the Valentino Fashion Group, a part of Permira, a London-based mergers and acquisitions firm. In 2011, a group of private investors, including Rosen and Howard, bought out Permira. In 2015, Castanea acquired a minority stake, although the terms of the deals were not disclosed.

In the September interview, which was conducted in the lead up to their Spring/Summer 2019 show, they cited the Thom Browne-Zegna deal as an ideal next step. "I guess one could argue that the plan for Castanea would be to then sell their stake to a strategic partner who can help us take things to the next level," Hernandez said. "Thom Browne is a really good example and definitely the goal."

The company said it plans to use the new funds to expand globally. Its existing licensing agreements — L'Oreal Luxe for beauty and fragrance and Onward Luxury Group footwear — will remain in place. But it's clear that Proenza Schouler faces further challenges ahead. In September 2016, former Selfridges executive Judd Crane joined as CEO following the exit of co-founder Shirley Cook.

Crane's job was to better position the brand to manage the slowdown in sales of PS1 by further developing other categories. (Footwear is now the company's fastest-growing segment.) During this period, the company also launched a lower-priced casual line — PSWL — and experimented with show location and delivery cadence, taking its collection to couture week in Paris twice. This past season, the designers returned to New York, showing a denim-driven line that was seen as a pared-down departure from their heavily worked Paris collections. Presumably this new partnership will allow them to restructure under Hong's guidance.

“Maybe we’ll never be a billion-dollar brand, but maybe that’s fine,” Hernandez said earlier this fall. “We don’t have to be.”

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