Brooks Brothers, FAO Schwarz Peddled at Cut-Rate Prices

They are two icons of American retailing with proud traditions of purveying high-priced, upscale products for more than a century – and, in more recent times, dismal performances in markets turned against them. Legendary men’s apparel chain Brooks Brothers Inc. and fabled toy merchant FAO Schwarz also shared the dubious honor of being sold off by their foreign-based parents during November at sharply discounted prices. Now that they are changing hands, the question is whether their new owners can turn them around and rescue the still-glittering but money-losing brands they purchased on the cheap. FAO Schwarz, or at least the bulk of it, was sold to The Right Start Inc., which apparently will team Schwarz with its Right Start and Zany Brainy operations to meld a stronger force in children’s products retailing. No cash changed hands in the deal, which is valued at $55 million. Right Start issued Schwarz owner Royal Vendex KBB preferred stock convertible into 5 million common shares and an $18 million note for 22 stores, Internet and catalog operations, and the FAO Schwarz name. Approximately 18 other stores were not included, suggesting that they may be the worst underperformers. Brooks Brothers represents more of a one-off turnaround play for its buyer, privately owned Retail Brand Alliance Inc., which has concentrated on women’s apparel stores such as Casual Corner and Petite Sophisticates. The price was $225 million or less than a third of the $750 million paid in 1988 by British department store chain Marks & Spencer PLC, reflecting the deteriorated demand for conservative, dressy clothing by U.S. professionals who have increasingly opted to dress down. Josh Chernoff, vice president of the consumer industries and retail practice at A.T. Kearney Inc., says that Schwarz has been chewed up by an industry mentality that emphasizes “blockbuster toys” and leans toward mass merchandisers such as Wal-Mart Stores Inc. and Toys ‘R Us Inc. The chains with “mega-volumes” not only can undersell the competition but also get favored treatment from toy manufacturers when they have to ration hot sellers. “The issue of scale and procurement is an increasingly important one, especially if you are trying to acquire the hottest goods when you need them,” Chernoff says. “In many cases, if a toy takes off it becomes constrained and the manufacturer puts the retailers on allotment.” He says that the addition of Schwarz will give Right Start virtually complete coverage of the children’s market – with the Right Start brand aimed at children up to four years of age, Zany Brainy focused on the four-to-12 age group, and Schwarz “almost to adulthood.” And as a larger operator, Right Start should enjoy “more clout on procurement” and greater ability to generate revenues from hot products, Chernoff notes. Brooks won’t enjoy the same synergistic leverage since Retail Brand Alliance’s tilt has been toward women’s retailing, and its expertise is not readily transferable, Chernoff says. In fact, both retailers and manufacturers have stumbled in trying to make and market women’s and men’s clothing at the same time, and Brooks Brothers itself has not met with success in selling women’s clothing. The hard road to a slow recovery Chernoff expects the dress-casual trend to peak at some point and demand for more conservative garments to rise, “although, we will never return to corporate uniforms.” However, he says that Retail Brand Alliance “cannot wait for that up-trend to refloat Brooks.” While the immediate future looks tough, Brooks Brothers is not without options, he says. For openers, the chain has to stem the losses from products lines that haven’t worked out and then improve its merchandising approach. “They have to get better at being a merchant that spans dressy to business casual lines,” he notes. “They have only been doing that tactically. They also can take advantage of the brand internationally. The problem is that the entire world economy is flat and there are no hot growth markets. However, Retail Brand Alliance is international and it may not suffer from the myopia that American retailers may have.” As a private company, Retail Brand Alliance also may be under less pressure than a public firm to turn Brooks Brothers around quickly and may have more patience in fashioning a recovery, says Chernoff.