Geoffrey the Giraffe became a knight in shining armour for toy retailer FAO Schwarz late Wednesday, as Toys R Us Inc. acquired the troubled high-end retailer, which has struggled for years against 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. 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, in New York City.
“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,” said Toys R Us chief executive Jerry Storch.
Storch said the company is still considering a broad range of options for the stores and hasn’t made any specific decisions yet.
As retailers have suffered as consumers cut back amid the recession, Toys R Us has fared relatively well. 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% as it cut costs, despite a 6% sales decline.
The company is using its strong position to scoop up competitors. In February, it acquired online toy seller eToys.com, which was under bankruptcy protection.
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 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 it 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 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.
“Keeping the FAO Schwarz brand to stand for what it is, an iconic specialty toy store, is the important thing,” he said. “It not only one of the oldest toy brands in the world, it tends to be outsized in people’s collective thoughts.”
