FAO loss widens–bankruptcy imminent?

On Dec. 17, a day after announcing a third-quarter net loss of $23.7 million, cataloger/retailer FAO (Nasdaq: FAOO), warned that unless its bank relaxed borrowing restrictions, it might have to seek bankruptcy protection.

King of Prussia, PA-based FAO posted net sales of $89.3 million for the third quarter ended Nov. 2. That’s a 52% improvement from last year, due to the January 2002 acquisition of upscale toys marketer FAO Schwarz and a full quarter’s worth of sales from toys retailer Zany Brainy, which the company had bought in late 2001. The company also owns The Right Start, a cataloger/retailer of apparel and accessories for babies and toddlers.

But the company’s third-quarter net loss ballooned to $23.7 million from $9.9 million last year. And on Dec. 13, “The Wall Street Journal” reported that at least two of FAO’s suppliers stopped shipping merchandise to the company due to nonpayments.

At least one major supplier, however, stuck up for FAO when contacted by CATALOG AGE last week.

“Every retailer we do business with occasionally has a slow pay,” said John Lee, president of Chicago-based Learning Curve, which owns several large toy brands including Lionel Trains, Lamaze, and Eden Toys. “For the last six months, FAO has been right on the money paying on time with us. And since we’re a fairly high-profile manufacturer in its mix, if there are any issues, I usually get inundated with calls from other manufacturers. So I believe this is more the exception than the rule and likely a couple of manufacturers who have specific axes to grind.”

In a statement, FAO president/CEO Jerry Welch said, “While our third-quarter performance was less than originally expected, we have successfully completed the integration of our three specialty retailing brands. More specifically, we completed the opening of 98 Right Start boutiques within our Zany Brainy stores during the quarter and early results are encouraging. However, the sales environment was just more difficult than we had expected. Even assuming a solid fourth quarter, we will incur a loss for the year.”

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