FAO Emerges from Bankruptcy

Finally, a ray of sunshine for cataloger/retailer FAO. On April 23, the parent company of toys retailer Zany Brainy, children’s products cataloger/retailer The Right Start, and toys cataloger/retailer FAO Schwarz emerged from Chapter 11 bankruptcy protection. When it filed for bankruptcy protection on Jan. 13, the King of Prussia, PA-based marketer listed assets of $257 million and liabilities of $238 million.

FAO closed a transaction with an investor group that bought $30 million in equity. The group includes Hancock Partners, FAO chairman Fred Kayne, retailer Saks, and Kayne Anderson Capital Advisors. Kayne Anderson CEO Richard Kayne is a member of the board at Saks, which earlier this year said it would open FAO Schwarz shops in most of its department stores.

FAO also closed on $77 million in bank financing, in the form of a $67 million revolving credit facility with a group led by Fleet Retail Finance and a $10 million term loan from Back Bay Capital Funding LLC.

FAO’s top priority now is to replenish the inventory at its FAO Schwarz, Zany Brainy, and Right Start stores. Since the January filing, the company had focused on inventory reduction and liquidation of certain stores.

On May 5, FAO told the Securities and Exchange Commission that it would not make its deadline for filing its annual report. But it expects to have lost about $105.0 million in fiscal 2002, compared with a net loss of $11.3 million for 2001. In the SEC filing, management blames the larger loss on “lower stores sales, restructuring expenses recorded in connection with the impairment of long-lived assets related to the stores identified as closing, and reorganization charges resulting from the Chapter 11 bankruptcy.”

A changing niche

While FAO’s new funding is good news indeed, the company still has to deal with challenges in the toy market overall. Value-price retail chains have stolen market share from boutique marketers such as Zany Brainy and FAO Schwarz. “Parents are more likely to go a Wal-Mart or a Target to buy their children toys,” says Stan Fridstein, president of Westlake Village, CA-based catalog consultancy Synapse Infusion Group and cofounder of The Right Start.

Then there’s the fact that “the toy category is a hits-driven business,” Fridstein says. And during the past few years there hasn’t been a hit on a par with Furby or Talking Elmo to boost sales.