Right Start Plan Is Not Child’s Play

If the strategy works, the combination of The Right Start Inc. and Zany Brainy Inc. offers a chance to lock in customer loyalty by families with children across the entire age spectrum, literally from the cradle to the onset of teenage years. But the project is a bold one for Right Start that carries a high degree of risk. The two firms, which are among the best-known retailers of upscale children’s toys, games, educational materials, and furniture, came together in early September when Right Start bought the far larger Zany Brainy out of bankruptcy. Right Start put a value of $100 million on the deal in which it paid $11.7 million in cash, assumed $85 million in liabilities, and issued 1.1 million shares. In an unusual twist, Right Start obtained $20 million in support from Waterton Management, a Los Angeles-based buyout firm, which took a 48% stake, fully diluted, in the combined chain. Right Start, based in Calabasas, Calif., operates 68 stores and a widely distributed catalog with products targeted for children up to the age of four. Zany Brainy, with 187 stores and a home base in King of Prussia, Pa., caters to kids who are four to 12. It filed for bankruptcy after meeting trouble integrating the acquisition of competing children’s chain Noodle Kidoodle Inc. and suffering a financial pounding from volatile sales of fad-type products. Josh Chernoff, vice president-Consumer Industries and Retail Practice at A.T. Kearney Inc., says that the strategy looks good on paper but that Right Start faces real problems in execution, not the least of which is its own financial troubles. Right Start suffered a net loss of $7.7 million on sales of $44.2 million in the latest fiscal year ended in January 2001 and just before completing the acquisition, it was served with a delisting notice by Nasdaq on the grounds that the stock no longer met listing criteria. Right Start continued to trade on the exchange while it appealed the decision. Chernoff says it’s a plus that the companies target affluent families interested in high-priced, non-violent toys and games. That, he adds, gives them the chance to “create greater lifetime value for both companies’ customer bases” and push consolidation in a “reasonably fragmented” industry. In theory, he says, Right Start’s idea to create 2,000-square-foot mini-stores for the very young in Zany Brainy’s stores, which typically run to 10,000 square feet in size, also looks appealing. But he adds that the plan may run into a financing shortfall. “The problem is that it is expensive to refit the stores at a time when both of these companies have significant cash flow issues,” he notes. “The amount of sales per square foot that Right Start would have to drive in order to compensate for Zany Brainy’s already weak sales per square foot is probably higher than Right Start has experienced. On paper it makes sense but they face significant operational hurdles to make this integration happen from a customer perspective.” Jerry R. Welch, chairman and CEO of Right Start, did not return a call for comment.