Competitive Intelligence

For FAO Schwarz, Christmas Looks Like A Humbug

Venerable retailer FAO appears poised for liquidation, even as the toy-shopping season approaches for Fifth Avenue's FAO Schwarz.

Zany Brainy is already being liquidated and FAO Schwarz and The Right Start are right-around-the-corner, if a buy-out can't be arranged before December 15th. Here's an excerpt:

...hefty competition, especially from discounters willing to slash prices, was too much for FAO. The company said in November it had instructed a banker to find a buyer for the business.

One likely suitor is Saks Inc., which invested $5 million in FAO and operates boutiques under the FAO name in some of its department stores, a person familiar with the situation said.

Another possible bidder could be Target, which has made a reputation of acquiring well-known brands like Isaac Mizrahi, this person said.

Julia Bentley, a Saks spokeswoman, didn't return a phone call seeking comment. A Target spokesman couldn't be reached.

FAO is racing the clock, given that the value of its inventory quickly loses value after the Christmas season.

As a result, the company said if a deal is not completed by Dec. 15 it could be forced to quickly sell the remaining assets of FAO Schwarz and The Right Start, including inventory, trademarks and leases.

That scenario would open the door to a wider range of buyers, including private equity firms and toy manufacturers interested in licensing the FAO Schwarz name, but not in running retail stores, analysts said.

The main assets for the 15-store FAO Schwarz chain include rights to the name, controlled by the FAO Schwarz Family Foundation, with an estimated value of $10 million to $12 million; the lease to the flagship Fifth Avenue store ($10 million to $12 million); and the inventory ($20 million). All told, the company could be worth $45 million to $55 million, analysts said.

- Arik