FAO, Hurt in Toy Price War, to Seek Bankruptcy Protection
It might be the season for giving toys, but not necessarily selling them.
The company that owns legendary toy retailer FAO Schwarz said Tuesday that it would file for Chapter 11 bankruptcy protection this week, a victim of the fierce toy wars pitting specialty stores against mass-merchandise discounters. It would be the second bankruptcy filing this year for the company, which emerged from Chapter 11 in the spring.
FAO Inc. said it might be forced out of business if it couldn’t find a buyer for its FAO Schwarz and Right Start chains by Dec. 15, a deadline imposed by the company’s lenders. FAO, based in King of Prussia, Pa., said it would liquidate Zany Brainy, a chain of 89 stores selling education-themed toys.
“It doesn’t look good,” said toy industry analyst Sean McGowan of Harris Nesbitt Gerard in New York. “The broader picture is that this is a brutal industry and you have giants like Wal-Mart and Target who don’t need to make money in this category.”
The price wars have also taken a toll on Toys R Us Inc., which five years ago lost its position as the nation’s top toy seller to Wal-Mart Stores Inc. Toys R Us said last month that third-quarter losses prompted it to reduce annual earnings estimates and close its money-losing Kids R Us and Imaginarium stores.
Toys R Us has tried to distinguish itself from the giant discounters by building up its inventory of exclusive and private-label products. As for FAO, it has billed itself as a premier seller of fine toys. In the face of this year’s discounting trends, neither strategy worked as well as the companies had hoped.
“Wal-Mart is selling things below cost,” said Jim Silver, publisher of Toy Wishes magazine. “It’s hurting everybody.”
Toy manufacturers are feeling the pain too.
With fewer toy-only stores, power is concentrated among the biggest megastores. They are aggressively pushing vendors to reduce costs. And by cutting retail prices, the discounters devalue the manufacturers’ brands, the toy makers complain.
“It’s not good, but this is the way it’s been for the last 20 years, and it’s only going to be more so in the coming years,” said Charlie Woo, chief executive of MegaToys, a downtown Los Angeles-based toy manufacturer. “Suppliers have to adjust to that environment.”
What’s more of a concern, Woo said, is that shoppers are increasingly heading to the discounters for their toys.
“People are really looking for bargains,” he said.
FAO -- which hasn’t posted an annual profit since 1994 -- has suffered a series of problems over the last decade, including overexpansion and ill-fated acquisitions. Baby products retailer Right Start, which got its start as a Westlake Village-based catalog company, bought most of FAO’s assets in 2002 for $55 million and adopted the 141-year-old company’s name.
When he took over the top job of the revamped FAO, former Right Start Chief Executive Jerry Welch touted his vision of a stable of premier toy retailers catering to children from birth to adolescence. But educational toy seller Zany Brainy, which Right Start bought in 2001 for $100 million, proved to be a financial drain almost from the start.
Kay Rubino, shopping at the Zany Brainy in Pasadena on Tuesday, said she hoped her favorite chain of toy stores would survive.
“I’d hate to see it close,” the Arcadia resident said. “One reason why I like to come here for my grandchildren is because of the type of educational toys that they have.”
The problem for Zany Brainy is that companies such as Emeryville, Calif.-based LeapFrog Enterprises Inc., which makes learning games that in recent years have been among the country’s best-selling toys, helped bring educational toys to mainstream retail stores such as Wal-Mart and Target Corp. At the same time, Zany Brainy began widening its offerings, making it less distinct from the bigger stores.
After suffering through most of 2002 with falling sales and earnings, FAO filed for bankruptcy in January. Although it emerged from Chapter 11 in April, the company said this fall that it was having trouble getting enough new financing to get through the crucial holiday selling season, which FAO had said would account for as much as 40% of annual sales. The company employs 4,900 people.
On Tuesday, FAO said it hoped to find a buyer for its 15-store FAO Schwarz chain, including its flagship store on Fifth Avenue in New York, and its 38 Right Start stores.
Both brands have an appeal, analysts said. But making a deal in this climate could be tough.
“Certainly there is a place in the world for FAO and what it stands for, but it’s not that easy and it has more stores than it can probably use,” McGowan said. “I always thought what FAO was selling was shopping bags and wrapping paper, like Tiffany. It says, ‘I loved you enough to pay extra’ -- and in this climate, that doesn’t go far.”
FAO has deals with companies like Saks Inc., in whose department stores FAO sells toys, and it could seek to expand those relationships, analysts said. They noted that Right Start had grown into a trusted brand, particularly among upscale mothers. Analysts said the chain’s database and customer lists were particularly valuable.
FAO shares closed at 24 cents Tuesday, exactly one year after hitting a 52-week high of $36 on Nasdaq. The company said it was taking immediate steps to delist its stock.
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Times staff writer Bryan Chan contributed to this report.
