Merger W s Hurt Zany Brainy Results

Jim Milliot |

Dec 11, 2000

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Merger W s Hurt Zany Brainy Results Jim Milliot -- 12/11/00 Acknowledging that the company had underestimated the resources necessary to integrate the recently acquired Noodle Kidoodle stores into its own Zany Brainy operations, Zany Brainy president Thomas Vellios said he was disappointed in results for the third quarter ended October 28, 2000. Sales in the period rose 3.4% to $76.4 million, but comparable-store sales fell 10% and the net loss from continuing operations deepened to $13.3 million from $4.2 million. The retailer's loss in the most recent quarter includes a merger-related charge of $3.1 million and a $2.2-million charge associated with its Internet joint venture, ZanyBrainy.com. The poor performance in the quarter was attributed in part to distribution disruptions in the first half of the period as the company integrated Zany's two distribution centers with Noodle's two centers. In addition, last year's third quarter included sales from PokÃ©mon products that accounted for about 13% of total revenues; excluding PokÃ©mon sales, same-store sales would have been up 5% in the quarter, according to Zany's chief financial officer Robert Helpert. Vellios said that with the Noodle integration completed, the company's stores are well stocked for the holiday season. The chain tinkered with its product mix, making video games available through its outlets, and Vellios said more product shifts will be made. Despite his optimism about fourth-quarter prospects, Vellios told analysts that sales over the Thanksgiving weekend were softer than forecast. Looking ahead to the next fiscal year, Vellios said the focus will be on improving the productivity at each of Zany's 188 stores, and he expects to see gains in both revenues and profits with positive comparable-store results. Vellios said Zany will open no more than 10 stores next year. The company will also take a "hard look" at what it can do to curb the excess capacity it currently has in its distribution centers, Helpert reported. Assumes Site Ownership A major initiative that Zany embarked on at the beginning of the month was assuming full ownership of the ZanyBrainy.com Web site. Vellios said the joint venture with Online Retail Partners "d sn't make sense anymore," prompting the retailer to dissolve the partnership. Under the agreement, Zany will receive substantially all the venture's assets and liabilities, paying ORP $1 million and issuing 1.25 million new shares of Zany stock to ORP. In return, ORP will continue operating the site through February 3, and Zany is hopeful that the company will continue to provide site hosting and maintenance past that date. Zany will combine the site with its catalogue operations in a new Zany Brainy Direct division. Helpert said the site is projected to lose $1.6 million in the fourth quarter, but that forecasts call for the online venture to be a "positive cash generator" next year. For the first nine months of the year, sales were up 4.6%, to $211.6 million, and the loss from continuing operations was $32 million, compared to $12.2 million in the same period last year.

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Merger W s Hurt Zany Brainy Results
Jim Milliot -- 12/11/00

Acknowledging that the company had underestimated the resources necessary to integrate the recently acquired Noodle Kidoodle stores into its own Zany Brainy operations, Zany Brainy president Thomas Vellios said he was disappointed in results for the third quarter ended October 28, 2000. Sales in the period rose 3.4% to $76.4 million, but comparable-store sales fell 10% and the net loss from continuing operations deepened to $13.3 million from $4.2 million. The retailer's loss in the most recent quarter includes a merger-related charge of $3.1 million and a $2.2-million charge associated with its Internet joint venture, ZanyBrainy.com.

The poor performance in the quarter was attributed in part to distribution disruptions in the first half of the period as the company integrated Zany's two distribution centers with Noodle's two centers. In addition, last year's third quarter included sales from PokÃ©mon products that accounted for about 13% of total revenues; excluding PokÃ©mon sales, same-store sales would have been up 5% in the quarter, according to Zany's chief financial officer Robert Helpert.

Vellios said that with the Noodle integration completed, the company's stores are well stocked for the holiday season. The chain tinkered with its product mix, making video games available through its outlets, and Vellios said more product shifts will be made. Despite his optimism about fourth-quarter prospects, Vellios told analysts that sales over the Thanksgiving weekend were softer than forecast.

Looking ahead to the next fiscal year, Vellios said the focus will be on improving the productivity at each of Zany's 188 stores, and he expects to see gains in both revenues and profits with positive comparable-store results. Vellios said Zany will open no more than 10 stores next year. The company will also take a "hard look" at what it can do to curb the excess capacity it currently has in its distribution centers, Helpert reported.

Assumes Site Ownership
A major initiative that Zany embarked on at the beginning of the month was assuming full ownership of the ZanyBrainy.com Web site. Vellios said the joint venture with Online Retail Partners "d sn't make sense anymore," prompting the retailer to dissolve the partnership. Under the agreement, Zany will receive substantially all the venture's assets and liabilities, paying ORP $1 million and issuing 1.25 million new shares of Zany stock to ORP. In return, ORP will continue operating the site through February 3, and Zany is hopeful that the company will continue to provide site hosting and maintenance past that date.

Zany will combine the site with its catalogue operations in a new Zany Brainy Direct division. Helpert said the site is projected to lose $1.6 million in the fourth quarter, but that forecasts call for the online venture to be a "positive cash generator" next year.

For the first nine months of the year, sales were up 4.6%, to $211.6 million, and the loss from continuing operations was $32 million, compared to $12.2 million in the same period last year.

A version of this article appeared in the 12/11/2000 issue of Publishers Weekly under the headline: