FAO Inc., the retail toy company that operates 253 toy stores including 23 FAO Schwartz outlets, 61 Right Start stores and 169 Zany Brainy shops, is teetering on the edge of bankruptcy.  It reported its third quarter results this week, which included a precipitous 20% drop in same-store sales from last year--sales at Zany Brainy stores are down 25% from last year, while sales at the flagship FAO Schwartz shops are down 10%.  FAO Inc. was put together by The Right Start Inc., which changed its name to FAO Inc. after acquiring FAO Schwartz for $55 million and Zany Brainy for $100 million during the past 14 months.  FAO has asked its bank to relax recently imposed borrowing restrictions, stating that it will be forced into bankruptcy under current conditions.


Wall Street analysts cite growing toy sales at deep discounters Wal-Mart and Target as the reason for declining sales at FAO.  Wal-Mart has become the nation's number one toy seller and Target has also moved aggressively into toy merchandising.  Evidently independent retailers are not the only ones who have difficulty in competing with Wal-Mart.  FAO Inc. plans to tighten its belt and close some stores in 2003 -- though not the flagship store on Fifth Avenue in New York, which was founded by German immigrant Frederick August Otto Schwartz.