FAO Schwarz Parent Seeks Chapter 11
Monday January 13, 5:54 pm ET
By Jonathan Stempel
biz.yahoo.com
NEW YORK (Reuters) - FAO Inc. (NasdaqNM:FAOO - News), the parent of FAO Schwarz and Zany Brainy toy stores, on Monday filed for Chapter 11 bankruptcy protection, 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 will close 75 to 80 of its 253 stores, up from the 70 it announced in December. It sought protection from creditors after last month asking lead lender Wells Fargo Retail Finance to relax credit terms.
Specialty toy retailers have been under strong pressure from discounters such as Wal-Mart Stores Inc. (NYSE:WMT - News) 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 while 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 on Monday 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 (NYSE:TOY - News) and can buy the same stuff for less."
FAO, based in King of Prussia, Pennsylvania, 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. The company, with about 4,683 full- and part-time employees as of Jan. 3, said it expects to emerge from bankruptcy by the second quarter.
CLOSURES
FAO also runs The Right Start, a toy retailer for infants and toddlers. Known until last year as Right Start Inc., FAO bought the assets of Zany Brainy out of bankruptcy in December 2001, and bought FAO Schwarz the next month. The company later changed its name to FAO Inc.
In a court filing, FAO said its lenders "impaired" its liquidity at a time of "a weak economic environment, a soft retail market, and restrained consumer spending."
Spokeswoman Renee Hollinger said FAO will 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 to close 55 Zany Brainy stores last month.
The company has "no plans" to close the flagship Fifth Avenue FAO Schwarz store, spokesman Alan Marcus said.
Frederick August Otto Schwarz founded FAO Schwarz in 1862, six years after he arrived in the United States from Germany.
Playthings' Weiskott said the toy industry is usually "recession-proof," but not now. "We have threats of war, a West Coast dockworkers strike and consumers wondering how long they would keep their jobs," she said. "I think consumers were spending less on upscale toy retail products."
On some items, consumers can save by shopping around.
For instance, the Harry Potter Whomping Willow Game is available for $29.99 on FAO Schwarz' Web site, while 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 percent, although common shareholders often lose their investment in bankruptcy.
LENDERS, SUPPLIERS
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.
Chief Executive Jerry Welch said in a statement that many suppliers pledged support for the company.
FAO said it also 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.
Mattel Inc.'s (NYSE:MAT - News) Mattel Toys, owed $1.14 million, and privately owned Danish toymaker Lego Systems, owed $1.13 million, are FAO's largest unsecured creditors, the bankruptcy filing shows. (Additional reporting by Frank Tang.) |
