FAO warns of liquidity crisis ahead
By Jennifer Waters, CBS.MarketWatch.com
Last Update: 5:43 PM ET Dec. 17, 2002
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KING OF PRUSSIA, Pa. (CBS.MW) -- FAO Inc. warned late Tuesday that it is facing bankruptcy as it struggles to persuade its biggest lender to ease up on borrowing restrictions.
Because of "rapid deterioration" of sources of capital needed immediately, the company said it was turning to relief from its main bank Wells Fargo Retail Finance LLC, a unit of Wells Fargo & Co. (WFC: news, chart).
Should Wells Fargo say no, FAO (FAOO: news, chart) said in a brief press release that it "likely would have to seek protection under the bankruptcy code in order to reorganize its operations."
The move comes after the parent of 253 stores under the FAO Schwarz, Zany Brainy and Right Start brands wiped out more than 42 percent of its market capitalization after a dismal earnings report. Shares ended the session lower by 84 cents at $1.10 -- a near three-year low.
On Monday, the company reported a third-quarter loss that more than doubled that of the year-ago period and said it was headed for a full-year loss -- even if the fourth quarter shapes up.
For the third quarter, the company lost $23.7 million, or 66 cents a share, wider than the prior year's $9.9 million loss recorded last year.
Net sales rose to $83.3 million from $57.2 million during the same period last year, driven mostly by this year's acquisition of FAO Schwarz. Also, Zany Brainy's results were computed for an entire quarter this year against last year's partial quarter.
The losses come at the hands of "restrained consumer spending and a weak economic environment" during a period when the company is working to wrap all three brands under one umbrella.
The company was started in 1985 as Right Start, which sells developmental, educational and care products for infants and toddlers. In September 2001, the company bought then decade-old Zany Brainy. In January, the concern purchased FAO Schwarz, the 140-year old toy store and changed its name.
Chief executive Jerry Welch conceded that the toy retailer was very dependent on fourth-quarter results, a practice that he plans to end as he steps up Right Start boutique openings and nontoy merchandising during the first three quarters of the year.
But until then, he's stuck in a cash crisis. "For the year, we accomplished all of our important operational and merchandising initiatives, significantly reduced combined expenses and improved gross margins," he said.
"However, the sales environment was just more difficult than we had expected," he added. "Even assuming a solid fourth quarter, we will incur a loss for the year."
Late last week, the Wall Street Journal reported that certain vendors complained they hadn't gotten paid while others were closely watching their receivables.
Jennifer Waters is the Chicago bureau chief for CBS.MarketWatch.com |
