Mass-market stores cut in to FAO Schwarz sales

By Michael Rubinkam
Associated Press

FAO Inc., parent company of 140-year-old FAO Schwarz, Zany Brainy and The Right Start, announced this week that it might have to file for bankruptcy. In the meantime, the company says it will close 70 stores by March.

"That's a little bit too much," Rivera, 47, told the boy as they walked out Monday. "You want to try another store?"

It's been that kind of year for 140-year-old FAO Schwarz.

Its parent company announced earlier this week that it is closing 70 stores by March and working with its lender to avoid bankruptcy.

FAO Inc., which also owns Zany Brainy and The Right Start, lost $23.6 million for the third quarter ended Nov. 2. Analysts said the celebrated toy store company just cannot compete with the likes of Wal-Mart, Target and other discount chains that carry many of the same toys at lower prices.

For instance, the LeapPad, a hot-selling interactive book that helps teach children how to read, sells for $59.99 at FAO Schwarz. It can be had for less than $40 at Wal-Mart, Target, Toys "R" Us and KB Toys.

"The prices are certainly not only not competitive with Wal-Mart, they are not competitive with anybody," said analyst Sean McGowan.

Then again, FAO Schwarz was never supposed to compete with the mass-market retailers.

Founded in 1862 by German immigrant Frederick August Otto Schwarz, FAO Schwarz has long had a reputation for exclusivity, carrying expensive and hard-to-get toys from all over the world.

The store on New York's Fifth Avenue remains a prime tourist destination. It was famously depicted in the 1988 movie "Big" in a scene in which Tom Hanks and Robert Loggia dance on a giant piano keyboard.

But King of Prussia-based FAO Inc. has not been able to transfer the cachet of its flagship to the 22 other FAO stores nationwide.

"I don't think FAO Schwarz means outside of New York what it means inside New York, unfortunately," said Chris Byrne, an independent consultant.

FAO Schwarz was bought by toy retailer The Right Start Inc. for $55 million earlier this year. The Right Start, which has since changed its name to FAO Inc., also bought toy retailer Zany Brainy last year for $100 million. FAO Inc. now operates a total of 253 stores nationwide.

McGowan and Jim Silver, who publishes the trade publication Toy Book, said Zany Brainy is a bigger drain on the parent company than FAO Schwarz is.

Zany Brainy, which sells educational toys for children ages 4 to 12, was in bankruptcy when The Right Start bought its assets. For the third quarter, same-store sales were down 25 percent at Zany Brainy, while same-store sales at FAO Schwarz were down only 10 percent.

FAO said 55 of the 70 closings will be Zany Brainy stores. The rest will be Right Start and FAO Schwarz stores.