Saks in FAO Deal

Saks Inc. is taking a minority stake in the bankrupt FAO Inc., which in turn will open up licensed shops inside Saks department stores.

NEW YORK — Saks Inc. is taking a minority stake in the bankrupt FAO Inc., which in turn will open up licensed shops inside Saks department stores featuring merchandise from its FAO’s retail concepts, including FAO Schwarz, The Right Start and Zany Brainy. The three chains sell toys and educational products for infants, toddlers and children.

This story first appeared in the February 25, 2003 issue of WWD.  Subscribe Today.

Under the agreement, licensed FAO boutiques, including FAO Express shops, will open in most of Saks’ 245 department stores, which operate under the names Parisian, Proffitt’s, McRae’s, Younkers, Herberger’s, Carson Pirie Scott, Bergner’s and Boston Store. Saks also operates the Saks Fifth Avenue and Off 5th stores, but those are not included in the agreement.

For the past couple of years, Saks Inc. has been trying to differentiate its stores by offering exclusive merchandise through an intensified proprietary brand program, introducing the Relativity, Pursuits and Studio Works women’s labels, among others, as well as by penning agreements with such brands as Laura Ashley, Jane Seymour and Ruff Hewn.

The FAO departments are seen opening in the second half of this year. Toys is a category that many department stores have downsized over the past few decades due to the rise of discounters and specialty chains.

Saks and FAO also are exploring several joint marketing initiatives and the opportunity to jointly own and operate an in-store and online electronic baby gift registry business that would be available to their respective customers.

“This partnership clearly supports the strategic direction for SDSG by providing distinctive and differentiated merchandise offerings to our customers,” said George Jones, president and chief executive of the Saks department store group.

Jerry R. Welch, president and ceo of FAO, said, “George Jones and his senior management team are leading an impressive reinvention of the department store business, and we look forward to partnering with them.”

FAO is operating under Chapter 11 bankruptcy and has filed a proposed plan of reorganization. Saks will purchase a minority share of FAO’s common equity as part of its reorganization plan and also obtain a seat on the FAO board, but specific terms of the agreement were not disclosed.

“FAO Schwarz has one of the great brand equities of American retailing and the average consumer has no clue about its operating difficulties,” said Isaac Lagnado, president of Tactical.org, a market research company. “All consumers are concerned about is the panache and the marquee value of the brand, and because of that, FAO Schwarz has been able to do some good private label programs. FAO Schwarz used to be really silk stocking, but over the last 15 years or so, it has positioned itself for the top third or half of the population. In that sense, there is a fairly good synergy and congruence with the mainstream Saks department stores.”

In addition, Lagnado said as far as Saks’ investment, “I don’t think there is a huge price tag or downside. Mainstream department stores desperately need novelty.”