Kids’ Retailer FAO Reports Loss

The parent firm of children’s specialty retailers FAO Schwarz, Zany Brainy and Right Start posted a $23.7-million third-quarter loss Monday, more than double the loss from a year ago and ensuring that the company will end the year in the red.

FAO Inc., the successor company to Calabasas-based Right Start, blamed the loss in part on sagging sales at stores open at least a year.

“The sales environment was just more difficult than we had expected,” said Jerry Welch, president and chief executive. He said that “even assuming a solid fourth quarter,” the company would face a loss for the year.

“They’ve got some very serious challenges ahead of them,” said Sean McGowan, managing director with Gerard Klauer Mattison, who does not cover FAO but is an expert on the industry. “They need to conserve cash, work out a new plan with their lenders and vendors and try to get through a tough year. This is a tough climate to be executing in, but on the other hand, they have strong brands, and that works in their favor.”

The company’s loss contrasts with a $9.9-million loss for the year-ago quarter. Sales for the chain, which has 27 stores in Southern California, increased 52.3% in the quarter to $89.3 million, largely because of acquisitions. But sales at stores open at least a year declined, ranging from an 8% drop for Right Start to a 25% dive for Zany Brainy shops.

The stock rose 26 cents to $1.91 on Nasdaq. Earnings were released after the market closed.

Right Start acquired Zany Brainy last year and later moved its corporate headquarters to Zany Brainy’s offices in King of Prussia, Pa.

The company acquired FAO Schwarz in January, adapting that well-known name for its corporate moniker.

FAO shares hit a 52-week low Friday on reports that at least two large suppliers halted shipments in the midst of the busy holiday season because they had not been paid for weeks.

Company executives said Monday that store shelves were stocked and that vendors were being paid. Top suppliers are owed a combined $9 million to $10 million, said Raymond Springer, the company’s chief financial officer.

“Our suppliers have not been refusing to ship to us,” CEO Welch told analysts Monday.

But Springer said that restrictions by some of the firm’s key lenders need to be eased if the firm is to deal with its liquidity issues.

Welch said the company planned to bring in an investment bank next year to help it raise funds. The company also said it planned to close some underperforming stores next year.