FAO Schwarz in distress, selling Las Vegas store

Tuesday, Nov. 20, 2001 | 9:46 a.m.

line SUN STAFF AND WIRE REPORTS

NEW YORK -- Just in time for the holiday shopping season, FAO Schwarz and its fantasylands for 5-year-olds in Las Vegas and New York are changing hands.

The buyer is the Right Start Inc., a California-based children's retailer that recently bought the Zany Brainy toy store chain out of bankruptcy proceedings.

Right Start struck a deal to acquire the FAO brand and 23 of its 41 toy stores -- including its store at the Forum Shops at Caesars on the Las Vegas Strip -- for about $55 million.

The $55 million is in a package of stock and debt that included no cash, said Jerry R. Welch, the president and chief executive of Right Start.

"Our primary interest is the flagship store (in New York)," Welch said. "It's still the ultimate toy store."

That store has been the crown jewel of a company founded almost 140 years ago in Baltimore by Frederick A.O. Schwarz. It gained fame through media exposure, including a supporting role in the 1988 film "Big," in which Tom Hanks portrayed a child in a man's body.

Right Start hopes to cross-promote FAO and its two other chains to the same target group of customers: affluent mothers whose average household income exceeds $60,000 a year. The company wants to attract customers willing to pay higher prices for more convenience and better service than they would find at other toy stores or mass merchandisers like Wal-Mart, Welch said.

But some analysts questioned that strategy.

"There are not many toys at FAO that you cannot buy at lower prices at Wal-Mart, Kmart, Toys 'R' Us and Target," said Kurt Barnard, president of Barnard's Retail Trend Report. "What consumers are looking for is good prices."

The transaction resembled a distress sale, with the buyer choosing which assets it wanted. Stores not being sold will be closed. Under its terms, Royal Vendex KBB, the Dutch retailer that bought FAO in 1989, would receive a stake of about 15 percent in Right Start plus about $18 million in debt.

Vendex said it expected FAO to post an operating loss of about $18 million this year. The sale, which includes FAO's catalog and Internet operations, is scheduled to be completed on Jan. 5.

Welch said all 60 employees of the 60,000-square-foot Las Vegas FAO Schwarz store, which occupies three floors at the Forum Shops, will be retained.

"Sales at the Las Vegas store have certainly been significantly impacted by the events of Sept. 11, but business is now recovering," Welch said. "We see this as an unfortunate circumstance with a short term impact. But we're very comfortable with the Las Vegas market. It's natural to have an Fao Schwarz in Las Vegas because the city attracts people from all over the country."