Toys R Us Acquires FAO Schwarz

NEW YORK — Geoffrey the Giraffe became a knight in shining armor for toy retailer FAO Schwarz, as Toys R Us Inc. said it acquired the troubled high-end retailer, which has struggled for years through bankruptcies amid tough competition from discount stores.

Analysts said privately held FAO Schwarz _ immortalized in the 1988 Tom Hanks movie "Big" _ was in danger of closing if a buyer did not materialize. Privately held Toys R Us _ the largest U.S. toy retailer _ meanwhile, will get an opportunity to work with smaller toy vendors, cut costs and operate a marquee store on 5th Avenue. Toys R Us announced the deal late Wednesday.

Toy retailers have been increasingly squeezed by discounters such as Wal-Mart Stores Inc. and Target Corp. as well as online retailers. The consumer spending cutback and recession has added to the pressure, winnowing the weaker players.

KB Toys Inc., Toys R Us' only major direct competitor, did not even make it to the holidays, filing for bankruptcy protection in December 2008 and liquidating its stores.

Although not immune to the tough economy and competition, Wayne, N.J.-based Toys R Us has had stronger results. Toy R Us Chief Executive Jerry Storch said the move could help give it a leg up on discounters.

"The FAO Schwarz name is one of the premier names in toys, and the acquisition enables us to differentiate even further with mass-market competitors," Storch said in a telephone interview.

While the company declined to give specific financial details, "the feeling is they got it for very, very, cheap," said Timetoplaymag.com analyst Jim Silver. "It really allows them to expand and work with a lot of smaller companies they've never worked with."

Storch said the company is still considering a broad range of options for the stores and hasn't made any specific decisions yet, other than it expects to retain store employees. It will operate the company's two stores in New York and Las Vegas. A deal FAO Schwarz brokered with Macy's Inc. to open small locations in 685 Macy's will end in November. Only 260 of those opened and the outposts will be phased out after the deal ends.

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"We feel it's a centerpiece for the entire toy industry," Storch said. "We can even be faster with new trends and quicker with the latest toys."

While many retailers reported weak earnings or losses in the all-important fourth quarter, which contained the weakest holiday season in decades, Toys R Us' quarterly profit rose 11 percent as it cut costs, despite a 6 percent sales decline.

It has used its relatively strong position to scoop up competitors. In February, it acquired online toy seller eToys.com, which was operating under bankruptcy protection.

FAO Schwarz meanwhile, has been struggling. The privately held company does not release sales data, but in December, the company's CEO told The Associated Press that like most retailers, the company experienced a drop in overall holiday sales, critical to toy retailers. In March, it replaced its chief executive Ed Schmults with Barry Erdos, the former president of online retail site Bluefly.com.

Known for high-end toys, FAO Schwarz has a history of financial difficulty. The company filed for bankruptcy protection twice in 2003, first in January after a weak 2002 holiday season. It was purchased by D.E. Shaw group in 2004.

Last year, it introduced $20-and-under toys in time for the holiday season, but it never carried "hit" toys like Elmo or Bakugan card game and remained largely dependent on tourists.

An operator like Toys R Us could help improve its own results, analysts said, by bringing in a better mix of specialty toys and toys from major toy manufacturers.

"FAO Schwarz is basically just two stores, if FAO went away wouldn't make one bit of difference for toy makers," said BMO Capital Markets analyst Gerrick Johnson. "But now that its under Toys R Us, there's better opportunity" to drive more sales and sell a wider variety of products, he added.

In return, Toys R Us owns one of the best-known names in the toy industry, Needham & Co. analyst Sean McGowan said.

He added that closing Macy's 260 outposts will likely not be a detriment to the deal since they were only 1 or 2 aisles in each store.

"Keeping the FAO Schwarz brand to stand for what it is, an iconic specialty toy store, is the important thing," for Toys R US, he said. "They served the purpose of keeping the name out there, but Toys R Us will get that in a different way. ... It not only one of the oldest toy brands in the world, it tends to be outsized in people's collective thoughts."

Toys R Us operates more than 1,500 stores worldwide, including 847 in the U.S.

Comments

[jalowe1957]

Once upon a time in Chicagoland, there was a retail toy supermarket called "Children's Bargain Town U.S.A." ("It's toy-riffic," was its slogan). Then, in the early seventies, it changed its name to "Toys R Us," and soon developed a manifest destiny complex as the chain went nationwide, developing spin-offs like "Kids R Us" and "Babies R Us" as if they were spun off a successful television series.

Let's call its FAO Schwartz acqusition for what it is: a cheap attempt at posing as something more classe than being at a power center or strip mall.

[Pippilangstrumpf]

My first reaction was to feel sad about this, but then I remembered going to NYC years ago and being so excited about going to FAO Schwartz...I could not believe my disappointment.

I thought it would be filled with unique, high end gifts and toys, but all it was...was several floors of basically Toys R Us stuff.

Big disappointment. So, in the end, what else is new? Quality and originality exist in very small quantities anymore. If you want something unique with good quality, you'll have to search out the small mom and pop stores and patronize them.

We need to start keeping it local! It's disgusting when you drive through any neighborhood and see the brightly colored big plastic toys that litter every lawn, only to drive back a few months later and find the same toys in the alley on top of the garbage heap. What a waste.

[petman2001]

This new toy conglomerate will officially change its name to: Monopolies R Us.

[grumbles]

From the ridiculous to the sublime. Toys Are Us is going to have to clean up it's act a bit if it is trying to clean up its image. What a junk shop it has turned into..........

[sonoffestus]

I have worked in the toy industry for the last 25 plus years. You get what you pay for. When one says they want quality, they are lying to themselves. Most folks wouldn't know quality if it bit them in the a@@. They can talk all they want, but the fact is, THEY WANT CHEAP.

Consumers want cheap, producers want cheap, so we get cheap. It is really very simple. Toys could be made in the states, but toy companies lack the creativity and now they lack the manufacturing knowlegde and skills necessary to address this issue. Actually, it is quite pathetic for a country that prides itself on innovation. If it wasn't for TV, movies and their licenses, toy companies would fold in a matter of months. They invest in cheap , NOT creativity.

The largest toy maker/ retailer in the world.....­..........­.......McD­onalds ! What does that tell you about the toy business?

The next big thing to happen in the toy biz is when Chinese toy manufacturers start to develop their own brands and when they start licensing various characters. Years ago, when retailers started to buy directly from US manufacturers, US toy distributors were wiped out in a few years. When the Chinese factories start dealing direct with US retailers, US toy companies will also disappear. The big ones know this hence they have been building huge operations in China. Who do you think the Chinese will buy first, Hasbro or Mattel?

[KillTheMessenger]

Last time I went into an FAO Schwarz store I found if filled with overpriced toys of medium to low quality. I was looking for something special and found it... in a small specialty toy store in the same city and the gift store of the local aquarium. At FAO... nothing but disappointment.

[marignymitch]

Sheesh! Back in the day FAO Schwarz was a great store, an almost magical place for a kid. I'll miss it. I hope a plaque in its honor will be erected at its original location, the southeastern corner of 5th and 58th.

[WarSkeptic]

FAO Shwartz offered well made products and good customer service
Unfortunately that kind of business doesn't work in our markets

[EinChicago]

"FAO Shwartz offered well made products and good customer service" at exhorbitant prices.

Hence the porblem.

[WarSkeptic]

To conservatives that is the problem
Well made products and good service

Better to have crappy toys from china and make your toystore into a warehouse, and suppress wages of your workers

[KillTheMessenger]

They used to offer well made product. That hasn't been the case in a while. I think someone there tried cutting cost by selling the same cheap stuffed animals that one can get everywhere... at an FAO price. That just doesn't work.

[AlexNYC]

FAO Schwarz was a fun and unique store to visit when it was at it's original location on the south corner of 58th Street. It's began to lose it's originality after it moved to it's current location in the late 1980s and started to franchise nationwide. It tried to get too big too fast. The Toys R Us acquisition was probably inevitable.

[bluguy8]

toys r us ruined the toy business--now its all cheap crap

[Tom95134]

So begins the trashing of FAO Schwarz.

[KCFreedom]

I think they trashed themselves. Bad management and too much debt taken on by fast growth.

Why do the managers of today think they have to go into a lot of debt to artificially grow fast?
(those MBAs are about useless)

[All in All]

Interesting to see how many other people that see Toys R Us as I do (Cheap & Trashy.... even their stores are the same).

[KCFreedom]

It's time for us 'mericans to start building our own toys again. Do it in our garages and sell at local markets. No lead paint, either.

[sb250guy]

No kidding! I understand the current economic situation but FAO Schwarz was an iconic type of thing. One by one, we're losing these things that are part of our national identity. Every mall looks the same. They all have the same stores. I'm tired of Applebees. Each one of these chain conglomerates, on its own, isn't so bad but it is getting harder and harder to find places with their own regional and local character.

[KCFreedom]

I was being serious. Why can't we go back to being individual craftsmen and build unique handmade items?

I concur with you. I hate malls and corporate stores. I try to support locally owned businesses as much as possible. Unfortunately, they are an endangered species and have many holes in what they provide, due to corporate retail.

Applebees; yuk. They used to be based in my home town until I-Hop bought them (after they got run into the ground) but that didn't make me like them, either.

[Shebeezies]

Hell has officially froze over.

[OneLiberalLady]

Toys RUs does the seemingly impossible: they make a toy store look boring and unattractive. Everything is stacked up rigidly on shelves, protected by impenetrable plastic. Antiseptic would be the word. Hope they don't do the same to Schwartz.