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Investments & Finance: Right Start Trades Stock for Better Looking Bottom Line

Right Start Trades Stock for Better Looking Bottom Line By CARLOS MARTINEZ Staff Reporter Last June, with its stock price barely above a dollar and the company on the verge of being delisted by Nasdaq, few might have figured that struggling The Right Start Inc. would shortly go on a shopping spree. But five months later, the Westlake Village-based infants and children’s goods retailer has gobbled up bankrupt rival Zany Brainy Inc. and most recently acquired 140-year-old toy seller FAO Schwarz, including its landmark New York City store. Right Start was trading at $5.11 on Dec. 7. Its stock was worth 88 cents a share, its 52-week low, on Dec. 21, 2000. Right Start, which last year lost $7.7 million on $53.6 million in sales, has now exchanged some of that stock for a position as one of the largest toy retailers in the country. So far, the move apparently has proved popular with investors who have pushed the stock above the $5 mark where it had languished for the past month. “People look at the company and go, ‘$650 million in revenue and a $200 million market cap, wow!'” said Bryant Riley, CEO of investment firm B. Riley & Co. in Los Angeles. The company, mostly through stock transactions, has managed to take over two struggling companies that bring cache in the case of FAO Schwarz and scores of new stores in the case of Zany Brainy Riley said. Zany Brainy filed for Chapter 11 bankruptcy in May. FAO Schwarz’s Dutch parent company, Royal Vendex KBB, put the money-losing 40-store chain on the auction block in September. “(Right Start) definitely took advantage of this opportunity,” Riley said. Right Start hasn’t posted an annual profit since 1994. Last year, Zany Brainy lost $80.7 million on $400.5 million in sales. FAO Schwarz lost $13 million on $208.4 million in sales last year. In the quarter ending July 30, Right Start lost $1.3 million on $13.5 million in revenue, compared to a $3.6 million loss on $14.7 million in revenue for the same period last year. Right Start CEO Jerry R. Welch blamed much of what he referred to as the company’s recent sales decline on a glut of product stemming from liquidation sales by E-Toys and others. “This was primarily felt in our 26 regional mall stores whose same-store sales for the first half were down 9.1 percent,” he said, adding that the company’s stores with street locations were not as severely impacted. Besides the 187 Zany Brainy stores it acquired in September, Right Start owns 65 stores in several states. Of the 40 FAO Schwarz stores in operation, Right Start is acquiring 23 stores, with Royal Vendex closing the 17 remaining stores. Right Start avoided delisting twice this year after Nasdaq warned that it failed to comply with the $5 million minimum market value public float requirement. Venture capitalists Richard and Fred Kayne had owned 83 percent of the company’s stock prior to the recent acquisition deals. To acquire Zany Brainy, Right Start gave up 1.1 million shares of stock and $11.7 million in cash and assumed $85 million of debt. The key to that deal was $20 million Right Start received from the Los Angeles-based private investment firm, Waterton Management LLC, in exchange for 48 percent of Right Start stock. “The best time to buy these things is when the industry is in disarray and when things are not going well there, so they’re doing the right thing,” Riley said. “They have a very experienced management team and they have a good chance of turning things around from what I’ve seen.” In its deal to acquire FAO Schwarz, Right Start will give Royal Vendex 5 million shares, 14 percent of its outstanding stock, and assume $10 million of debt. Riley said he remains unsure of whether Right Start ultimately can be profitable, given the sluggish economy and an uncertain holiday sales period. On the bright side, however, he pointed out that Right Start is among the few specialty children’s stores remaining, after Warner Brothers and Disney agreed earlier this year to close their stores. “They’re like the last ones left standing,” Riley said.

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