FAO greets holidays with bankruptcy plan Zany Brainy to close, FAO Schwarz up for sale

Posted: December 03, 2003

Toy retailer FAO Inc., facing stiff price pressure from discount stores, said yesterday that it would shut down its Zany Brainy stores and might have to close its namesake FAO Schwarz stores as well.

FAO, based in King of Prussia, said the store closings would be part of its second bankruptcy-court filing in less than a year.

FAO said it expected to keep the 89 Zany Brainy stores around the country open through the end of this month as it sells off the inventory of educational toys that made the chain a novelty when it was founded in 1991 with a single location in Wynnewood.

FAO said in a statement that the Chapter 11 petition, to be filed this week in U.S. Bankruptcy Court in Wilmington, would allow the company to try to find a buyer for its FAO Schwarz and Right Start divisions.

But the company said it had hired liquidators to sell the inventory of all three divisions if a buyer could not be found for the 15 FAO Schwarz stores and the 38 Right Start locations by Dec. 15. Customers and store employees "should not see any significant difference in [store] operations," the company's statement said.

The company said it would make major cuts in its non-store workforce but did not say how many employees would lose their jobs.

FAO, founded in 1870 in New York by Frederick August Otto Schwarz as Toy Bazaar, was an instant hit, with customers lining up for blocks to be greeted by a three-floor-tall clock tower singing "Welcome to Our World of Toys." The company's flagship FAO Schwarz store, where Tom Hanks danced on the keys of a giant piano in the 1989 movie Big, remains a tourist attraction on Fifth Avenue in New York.

Analysts said all toy retailers faced a major challenge today from big discounters such as Target Corp. and Wal-Mart Stores Inc., which are willing to sell some toys below cost just to drive traffic to their stores.

"Toys R Us, Zany Brainy, KB Toys - all are having a tough time facing head-on the competition from Target and Wal-Mart," said analyst Walter F. Loeb of Loeb Associates in New York. "In this economy, value is still important."

Loeb said he would not be surprised if FAO could not find a buyer for its FAO Schwarz stores, other than the Fifth Avenue flagship.

"The name [FAO] is magic in New York City, and the store is magic in New York City," he said. "But in some suburban shopping centers, it's just another store."

The Zany Brainy stores are more likely to be missed in the Philadelphia area, especially in the neighborhoods where they started, Zany founder David Schlessinger said.

The Zany Brainy stores were innovative when they opened, providing baby-boomer parents with a better selection than competitors of toys and games designed to expand children's minds, customers and analysts have said.

Schlessinger, who had started Encore Books in Philadelphia in the 1970s and now operates Five Below, a chain of stores for 8- to 15-year-olds where everything is $5 or less, said the demise of Zany Brainy was "very, very sad.

"The stores were a very important part of the fabric of the communities in which they operated," he said.

Schlessinger, who has not been involved in the management of Zany Brainy since 1998, said he believed the stores were successful through the 1990s because of good product selection, daily events in stores to educate and entertain children, and employees who were trained as "kid-sultants" and advised parents on the best toys for a child's age and educational development.

Zany Brainy went public in 1999 at $10 a share and filed for bankruptcy protection in May 2001.

FAO was formed 2 1/2 years ago when California entrepreneur Jerry Welch, who owned Right Start, acquired Zany Brainy. In January 2002, Welch acquired FAO Schwarz and merged the three operations into one company.

In January, FAO was back in Bankruptcy Court, blaming a poor holiday selling season and "restrictive" lending practices by its creditors for forcing it to seek protection. The company had 169 Zany Brainy stores then, including 10 in the Philadelphia area. It had closed about half the Zany Brainy stores by March, and emerged from Chapter 11 protection in April.

Shares of FAO Inc. closed yesterday at 24 cents in over-the-counter trading.

Contact staff writer Tom Belden at 215-854-2454 or tbelden@phillynews.com.

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