Toys ’R’ Us Buys FAO Schwarz

Toy and baby products retailer Toys ’R’ Us announced yesterday it has acquired upscale toy merchant FAO Schwarz. Terms of the deal were not disclosed.

During the past few years Toys ’R’ Us has been “working hard to position the company for long-term growth,” says spokesperson Jennifer Albano, “and as part of our strategy, we continue to look for new ways to grow market share in the toy and baby products sectors.”

The acquisition “allows us to grow our toy specialist market share and draw upon the unique strengths of both brands in developing quality products that differentiate us from our mass market competitors,” Albano says.

Toys ’R’ Us will continue to operate the two FAO Schwarz retail stores, including the flagship location in New York and a store at the Forum Shops at Caesars Palace in Las Vegas, Albano says. What’s more, the company will operate the FAO Schwarz e-commerce and catalog operations.

“Each of these businesses will continue to operate under the legendary FAO Schwarz name,” Albano says. “We intend to continue to offer FAO Schwarz customers the unique and distinctive merchandise assortment that they have come to expect from the brand.”

FAO Schwarz also owns Best & Co., a luxury children's apparel and accessories merchant it acquired in November 2007. The deal also means FAO will discontinue its agreement to open boutique locations in roughly 680 Macy’s stores. Macy’s and the toy maker entered into the deal in May 2008, and Schwarz to date operates in roughly 280 stores.

Toys ’R’ Us sells merchandise in more than 1,500 stores worldwide, including 847 Toys ’R’ Us and Babies ’R’ Us stores in the U.S., more than 700 international stores, which includes licensed and franchise stores, and through its Internet sites. Toys ’R’ Us earlier this year acquired eToys.com, Babyuniverse.com, Toys.com and parenting resource site, ePregnancy.com.

FAO Schwarz is backed by investment and technology private equity firm D.E. Shaw Group, which bought FAO out of bankruptcy in 2004 from its parent company, baby products merchant The Right Start. Barry Erdos, the former president/chief operating officer at fashion apparel Website Bluefly, has been CEO of FAO Schwarz since March. He replaced Edward Schmults, who resigned to pursue other interests.

How do financial analysts view the major acquisition? Lee Helman, managing director for investment firm Financo, is a little surprised that Toys ’R’ Us was the buyer, “but the strategy clearly has its merits.”

Helman also thinks that Toys ’R’ Us’ buying power will help enhance FAO’s gross margins on select products. “The FAO brand is distinctive and timeless, and it will be interesting to see what Toys ’R’ Us’ plans are for growing the business.”

Big box stores like Toy ’R’ Us are looking for smaller formats, and FAO gives it the premier name in the toy retailing arena, says Stuart Rose, managing director for investment firm Tully & Holland. But to make it work over time, he notes, “Toy ’R’ Us must make sure that it keeps the brand of FAO distinct and separate from Toys ’R’ Us.”

That means more than a name, but different merchandising, operations and design, Rose says. “The toy industry is difficult and here we have the two biggest names—each which have had problems over the years—joining forces.”