3 FAO Stores Spared From Liquidation 1 More Day

Bankrupt retailer FAO Inc. said yesterday that its liquidators agreed to extend through today its right to remove its Right Start stores and up to three of its FAO Schwarz flagship stores from liquidation.

“Someone will get their hands on the three [prime] retail locations of FAO Schwarz; and they are currently in negotiations with someone for the sale of the Right Start chain,” said Jacques Roizen, director at turnaround and restructuring firm Alvarez & Marsal, New York. “Otherwise there is no reason to ask for an extension.”

He said the disposition of FAO boils down to three issues: the Right Start chain; FAO Schwarz's leases; and the company's brand.

“They have a bid of over $6 million for the Right Start chain, which is not a lot, but one could argue that whatever the final price ends up being, it's only a portion of what you'll have to invest in that venture to take it over and reposition it to compete with the Imaginariums of the world,” he said.

The leases had been discussed in prior bankruptcy filings.

“You can bet that on FAO Schwarz, there is little doubt that those three locations are New York, Chicago and Las Vegas, which are their three prime locations, the New York flagship in particular,” Roizen said, “with almost 10 years left on the lease at a rent negotiated way before the hype of commercial real estate space in New York City. It is a very advantageous lease that people are interested in.

“The FAO flagship is clearly the crown jewel of FAO's assets. If it's up for grabs, the current owner will try to get their lease back to capture as much value as possible.

“The Right Start will be sold as an independent retail chain, and the three FAO Schwarz leases [must] find an acquirer. You're not going to liquidate [the New York store with] a fire sale at [59th Street] considering the price of the real estate near the Plaza Hotel.”

Regarding the brand, Roizen said that the foundation that owns the FAO Schwarz name has the right to stop a transaction if it thinks a buyer is not up to par.

“It mentions companies like Saks, Barney's and Bloomingdale's as what the standard of first quality is,” he said. “That makes it impossible for mass merchandisers such as Wal-Mart or Target to purchase it, given what the foundation's conditions are for the use of the FAO Schwarz brand.”

He said the brand is salvageable, but not as a Toys 'R' Us competitor.

“FAO should have, at most, 40 stores, [and] that would take three years,” he said. “They need to start all over again, making sure the brand stands for the right thing. In the last 12 to 18 months, they went more toward mass appeal by not being as selective in terms of location and merchandising mix. That's where they lost their identity.”

Roizen cited the significance of Toys 'R' Us reinventing itself.

“It used to be a toy retailer organized in a warehouse fashion, and now it offers a pleasant experience where kids have the opportunity to play with the toys in the store, and associates are supposed to help the consumer as opposed to just stocking the shelves,” he said.

“You need to rebuild the brand by going back to the roots of what FAO Schwarz stands for — value-adding services and a higher-end toy,” he said. “There is still a market for that type of retail value proposition, but you can't focus on that market and have 150 stores.”

Toy entrepreneur Ken Hakuta said last week that he is negotiating to buy FAO Schwarz and FAO Inc.

“I have determined that it is not viable for a toy retailer to put in a bid to lease the Fifth Avenue flagship location,” he said. “I'm out of the running for the Fifth Avenue location, but I still want the FAO trademark in order to continue the catalog and online business and hang the FAO Schwarz shingle on another location.”

Hakuta, who is known as “Dr. Fad,” said he has a new co-investor in the deal: Ruth Owades, founder of catalogers Calyx & Corolla and Gardener's Eden. Jerry Murphy, who is president of the Harvard Cooperative Society, Cambridge, MA, is an adviser on the deal.

“If we acquired that location, we would go right back into bankruptcy in six months,” Hakuta said.

He has no interest in owning FAO retail locations outside of New York.

“With the loss of the Fifth Avenue location, there is a lot less value to the name, and frankly I don't think there will be too many bidders on it,” he said.

The company also said it received court approval to accept previously issued gift cards and merchandise credits through Jan. 11.

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