FAO sees increase in sales—and net loss from operations

FAO Inc.

(Nasdaq: FAOO), the newly created parent company of the FAO Schwarz, The Right Start, and Zany Brainy children’s products catalog/retail brands, posted a hefty increase in net sales for the quarter ended Aug. 3. On the down side, the company’s operating losses, which reflect non-recurring costs and expenses related to the integration, also increased considerably for the period.

Net sales for the quarter were $90.0 million, compared to $13.5 million last year. The operating loss for the second quarter was $15.9 million, compared to an operating loss of $1.1 million last year. The operating loss includes $830,000 of non-recurring costs and expenses related to the integration of Zany Brainy and FAO Schwarz. Net loss for the second quarter was $18.2 million, compared to a net loss of $1.3 million last year. Net retail sales for the quarter were $87.8 million, including $10.2 million from The Right Start, $53.7 million from Zany Brainy, and $23.9 million from FAO Schwarz, compared to net retail sales of $12.0 million in the second quarter of fiscal 2001 for The Right Start.

The King of Prussia, PA-based company, formerly known as The Right Start, bought Zany Brainy in September 2001 and FAO Schwarz in January 2002. “During the second quarter we made excellent progress in executing our three-year business transformation strategy to grow revenues and realize operating efficiencies through the consolidation of our three specialty retailing brands,” said Jerry R. Welch, president/CEO in a statement. “Although this is only the second full quarter in which we have operated as a combined company, we tracked very well against our consolidation and merchandising initiatives and these initiatives will be completed by the important holiday selling season.”

Given the weak economic environment and cautious consumer spending patterns, FAO is reducing its revenue guidance for fiscal 2002 to $535-$555 million, from $565 million-$585 million. The company estimates that full year EBITDA will be in the range of $13 million-$18 million, compared to previous forecasts of $21 million-$25 million. For fiscal 2003, FAO expects sales of $675 million-$695 million and EBITDA of $40 million-$50 million.

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