America's oldest and most storied toy store is on the brink of collapse just before Christmas. FAO said Tuesday it was almost out of money.
The parent of the 141-year-old FAO Schwarz stores said it's on its way to bankruptcy for the second time in a year after creditors pulled the plug and further financing couldn't be found.
FAO said it will liquidate the 15 remaining FAO Schwarz toy stores -- including the flagship Fifth Avenue store in New York with human toy soldiers standing guard at its doors -- along with its 38 Right Start child-developmental stores, unless a buyer rescues them by Dec. 15.
It already plans to liquidate its third chain, the 89 Zany Brainy learning stores. The future of the company's 16 FAO Schwarz Boutiques inside department stores owned by Saks was not immediately clear.
Shares of the troubled toy retailer were halted ahead of the Tuesday morning announcement. When trading resumed, shares dived 73 percent, or 66 cents, to 24 cents. The cash-strapped King of Prussia, Pa., company said it would delist its shares and expected the shares to eventually be worthless.
The news comes only weeks after FAO warned investors that a cash crunch might force it to close its doors. The company said Nov. 10 it had received a notice of default from lenders who also had pulled the plug on further credit.
Those company statements came after FAO vehemently denied an October New York Post article that a cash crunch was forcing it to delay payments to vendors and fund other operations. FAO also rebuffed suggestions that its suppliers were tightening credit limits.
In a press release then, FAO called the report "misleading" and said it "threatened to impact operations." The company added that liquidity was fine and that it would generate "sufficient operating income in the fourth quarter to offset losses typically experienced in the first three quarters of the year," according to the Oct. 20 press release.
On Nov. 7, FAO admitted that sales were sluggish despite holiday marketing efforts. If that continued, FAO said then, "it would not have adequate liquidity to operate its business normally in November and that liquidity in December would depend on whether the sales trend improves through the holidays."
Tuesday's statements were a clear indication that sales failed to track higher on Black Friday and the rest of the Thanksgiving weekend -- one of the busiest shopping periods in the year.
FAO said it will file voluntary bankruptcy petitions later this week under Chapter 11 in Delaware.
In the quarter that ended Aug. 2, FAO said plummeting sales left it with a loss of $18.8 million, or $4.05 a share, compared to the year-ago loss of $18.2 million, or $8.01 a share. In the first half of this year, the company lost $56.7 million.
FAO came out of bankruptcy protection in April, three months after it filed for Chapter 11. Like other toy stores such as Toys "R" Us and KB Toys, FAO has suffered at the hands of discounters such as Wal-Mart and Target.
In recent weeks, for example, Wal-Mart and Target have cut prices deeply on select and branded toys and games. That kind of competition is forcing Toys "R" Us to dismantle its Kids "R" Us stores, that company said last week.
Though the FAO Schwarz brand is the cream of the toy chest, it will be tough to find a buyer, said Jacques Roizen, a turnaround specialist at Alvarez & Marsal.
"Who would want to buy locations that are screaming to be closed," he asked. Under its first bankruptcy last year, FAO closed almost 50 percent of its toy stores, including another flagship in Chicago's high-end Gold Coast and its Union Square store in San Francisco. But, Roizen said, the closings were based on sales and profits, rather than a strategic reorganization of the company.
"They had a shot at a repositioning with a new business plan that would have acknowledged that they can't compete with Toys "R" Us," he said. "But they didn't capitalize on the their high-end image and try to re-establish FAO as the retailer for significantly more wealthy customers than the average toy customers who shops at Toys R Us."
RetailForward's Geoff Wissman said he was disappointed that the cache of the FAO brand wasn't enough to overcome the onslaught of toys-for-cheap competition. He too thinks the company will have trouble finding a buyer. Listen to Wissman's comments.
What's worse, according to Roizen, is that the holiday season could wind up being the ultimate death knell of the revered brand. Tuesday's press release said the stores would be in business-as-usual mode throughout the month.
"What does that mean? Good discounts, but no returns? That's not very appealing to many people," Roizen said.
If the FAO Schwarz survives the holiday season intact, Roizen said a second chance at repositioning as the higher echelon of toys and toy-shopping experiences for children is key to a longer life.
"FAO Schwarz is a fantastic brand that stands for something fantastic," Roizen said. "FAO stands for good experiences, kids who are happy, high-end merchandise that makes a margin. From a retail point of view, it's a very exciting brand."
Without a white knight, it's unclear who might buy the stores. Among the biggest contenders would be the Saks (SKS: news, chart, profile) chain. FAO and Saks inked a deal last summer to sell select FAO Schwarz toys in the department stores -- a move that follows similar exclusive arrangements other department stores have made with designer and high-end labels.
Saks CFO Douglas Coltharp sits on FAO Schwarz's board of directors. A spokeswoman from Saks was unavailable for comment.