Toy Retailer FAO Seeks Protection From Creditors

FAO Inc., the parent of FAO Schwarz and Zany Brainy toy stores, filed for Chapter 11 bankruptcy protection Monday, succumbing to weak sales and intense competition from discounters.

The 141-year-old company, known for its flagship Fifth Avenue store in Manhattan where Tom Hanks danced “Chopsticks” on a giant piano in the movie “Big,” said it would close 75 to 80 of its 253 stores, up from the 70 closings it announced in December. It sought protection from creditors after asking lead lender Wells Fargo Retail Finance last month to relax credit terms.

Specialty toy retailers have been under strong pressure from discounters such as Wal-Mart Stores Inc. that can slash toy prices and make up the difference on other products.

“When giants like Wal-Mart want to come in and cut into market shares, events like this are going to happen,” said Maria Weiskott, editor-in-chief of Playthings magazine, a toy industry publication.

Analysts and shoppers said that although FAO Schwarz remains an industry icon, it cannot compete with big rivals on price.

“FAO has a wide range of toys, pretty much everything you need,” said Michelle Ostroff, 34, who was shopping in the Fifth Avenue store with her 3-year-old daughter, Jessica. “But their prices are not competitive. I can go to Toys R Us and can buy the same stuff for less.”

FAO, based in King of Prussia, Penn., listed $257.4 million of assets and $238.4 million of debts in its filing with the U.S. Bankruptcy Court for the District of Delaware. Company spokesmen declined to say when FAO expects to emerge from bankruptcy protection.

FAO brought Zany Brainy out of bankruptcy in 2001. It also runs Right Start, a toy retailer for infants and toddlers.

Spokeswoman Renee Hollinger said FAO would talk to landlords about possible rent reductions and said closures “will affect all three chains, with the most happening at Zany Brainy.” FAO announced plans last month to close 55 Zany Brainy stores.

The company has no plans to close the flagship Fifth Avenue FAO Schwarz store, spokesman Alan Marcus said.

Playthings’ Weiskott said the toy industry is usually immune to economic slowdowns, but not this one.

“Toys are usually a recession-proof industry,” Weiskott said. But it has been affected by the threat of war with Iraq, a West Coast dockworkers lockout and consumers wondering how long they would keep their jobs. “I think consumers were spending less on upscale toy retail products,” she said.

On some items, consumers can save by shopping around.

For instance, the Harry Potter Whomping Willow Game sells for $29.99 on FAO Schwarz’s Web site, whereas Wal-Mart’s Web site offers the same product for $5, marked down from $9. Toys R Us charges $9.98.

FAO shares closed Monday on Nasdaq at 51 cents, up 13 cents, or 34.2%.

“Having already made significant strides in our restructuring efforts ... we are now able to turn our focus toward ensuring our long-term financial health,” FAO Chief Executive Jerry Welch said.

In its quarter ending Nov. 2, FAO lost $23 million, or 66 cents per share, on sales of $89.3 million.

FAO said it agreed with lenders to use about $20 million of cash collateral, which upon court approval and with operating revenue will let it pay suppliers and employees. It said it plans to hire an investment banker to help it raise equity capital.

Policies on store returns, exchanges, credit purchases and gift certificates will not change, the company said.