Great expectations

In less than five minutes of conversation, it becomes clear that Ed Schmults lives for the challenge. Just four months after taking over the day-to-day reigns at FAO Schwarz, he's already battle-hardened, having survived a critical holiday selling period at the humbled but still legendary toy emporium.

Now digging in for the real work ahead, Schmults is clearly on a mission to prove that both he and FAO are up to the task of reshaping the legacy merchant into a 21st century business that might very well survive another 144 years. For now, however, the 12 months ahead are the task at hand.

Schmults is a high-energy, high-touch manager. Picking away at an ice cream sundae at FAO's flagship store in New York, he outlined the critical elements of his mission: fix and enhance operations and logistics; sharpen merchandising and merchandise; reinvigorate and expand the print catalog; and vastly exploit the Internet—all aimed at becoming a truly global, multi-channel retailer with a precise market space. And, of course, to turn a profit.

“I like the challenge of a turnaround,” he tells Playthings. “Fixing problems is something I've done many times now in my past career, and I like the challenge of it, the way it focuses your interest.”

Schmults was named CEO last October by the retailer's private equity owner, D.E. Shaw, which paid $41 million to pull the remnants of the company out of bankruptcy. He's a native New Yorker, a Yale alum and a Harvard Business School grad who, in his early 40s, has been steadily working on his résumé with senior executive stints in consumer products and retailing at Red Envelope, Patagonia and Moonstone, with earlier posts at Goldman Sachs in both New York and London.

Schmults says that his background has given him the scope and depth he needs to steer the company successfully through its next metamorphosis. Operations, marketing and merchandising are core strengths, which he'll team with some of FAO's existing executive talent.

“From a merchant perspective, I'm very glad to have a David Niggli here. [He's] someone who has history and perspective and experience,” says Schmults. “I'm also not shy about my own ideas, and David and I are working well together, putting our ideas into place and making changes this year in the merchandising mix, [which are] really important in the success of this business.”

Currently, store conversion rates are only “okay” from the standpoint of a retail toy business and a Manhattan retail experience. They could be substantially better, Schmults acknowledges. That explains his interest in “tinkering” with the merchandise assortments: to better understand the store's profit drivers and how turns can be increased to generate more cash and freshness without too much risk.

“What are my levers to drive down costs while maintaining and improving a high level of service and brand integrity, which are so important?” he asks. “If we're going to have a world-class brand, we need to have world-class performance.”

For now, those merchandise changes remain under wraps—a work in progress.

Schmults says improving operations and logistics are his immediate priorities as merchandising enhancements come more slowly, requiring a season or two to repair, adjust and refine. The big marketing improvements will come only after the rest of the house is in order.

“We need to make a lot of progress on the logistics side of the business; how we bring products in, get them in our stores and get them available for shipping out in mail order,” Schmults explains. “[For] Internet customers, for example, speeding up the time to delivery to the customer is extremely important.”

After a year or so of operational repairs, and after a successful holiday selling period in last year's fourth quarter, Schmults is thinking in terms of where to push the business' growth. He firmly believes the challenge will be to translate the emotional experience of shopping in stores to the virtual space of the Web.

In a multi-channel world, each channel feeds the other. Stores ground the brand and create a connection with the customer. Catalogs drive sales into the stores and on the Web. The Internet reinforces the selection in the stores and broadens their reach. Kids, who already spend a lot of time online, can be engaged by a site that informs and educates as well as entertains. The goal, according to Schmults, is to pull them in today and work to have them bring their grandchildren to the site 40 or 50 years from now.

“As a global brand, I'd love to teach kids here what kids in Northern Italy play with. Here's what kids in Southern India play with. Here's how Sri Lankan children spend their day,” he says. “There's a lot of rich content there we can mine. I think with a brand like FAO Schwarz, I can drive sales, but also spend the time and energy to make it a rich site for children to learn.”

FAO enjoys a unique position among toy retailers, and by Schmults' account, the brand didn't suffer much damage from the bankruptcy and change in ownership over the last few years. The New York store still welcomes more than 3 million visitors annually—many from out-of-state or other countries.

That has already positioned FAO as a brand with global pull—a factor that will play well in the catalog and Internet businesses, as well as offer the possibility for limited international store expansion sometime in the future. Currently, FAO's only location outside of Manhattan is in Las Vegas.

“I'm happy with the store base as it is now,” Schmults says. “My initial thinking is we probably won't open many, if any, additional stores in the U.S. There's such a destination aspect to this store and this space—it's a fabulous space we have here. To try to recreate that in a [typical] mall or some other town just doesn't work.”

Internationally, however, the vision may be more expansive. “Might we open a store in the future in London, Dubai or Shanghai?” Schmults neither rejects nor publicly supports the idea.

For now, Schmults' hot button remains the direct channels, especially the online store. People just don't know about the site, he laments. So he'll begin focusing on search engine marketing to improve a situation where currently FAO is barely visible when searching Google with the key words “toy” or “toy store.”

The catalogs also offer much more than products, extending deep into the marketing and branding of FAO. Schmults noted that in his experience with sports outfitter Patagonia, a single item frequently occupied an entire page.

“But on that page, there was a lot of information about why this is a fabulous item, highlighting the care and attention we took to make that one item. There'd be a picture of a guy skiing off a cliff. You may only wear that item to walk the dog, but you'll have a little steam in your stride knowing you could ski off a cliff with it if you wanted to.

“My initial view of [FAO's] catalog is to use it as a marketing piece to goose that customer in North Texas,” Schmults continues. “Instead of having 10 products on a page, you'd see the best items we can do, what we are about as a brand. Tell the story.”

A catalog's power to communicate those qualities is unmatched, particularly in its staying power—on a table or next to a couch for three or four months at a time. FAO is reintroducing its spring catalog this year in a move to harness some of that power. Expect more changes over time.

Yet at the core of all the changes remain the stores. Strong retail discipline and a high level of execution will be needed to continue the company's turnaround, according to Schmults.

The stores' personnel will remain dedicated to enhancing the customer experience, which will include high levels of customer service, quick check-outs and perhaps even in-store kiosks permitting store merchandise to be selected and shipped without the need for the customer to get on a check-out line while lugging an oversized toy.

As an example, Schmults suggests the creation of an FAO club that would offer in-store enhancements for members—such as, for example, a free sundae—to make a visit special. There is no shortage of ideas; it's the execution that matters, he says.

“Our customers are technologically savvy kids, and we have all this bright, colorful neat stuff we engage children with here in the store, through rich content on our web site, or through great pictures in our catalog,” Schmults says. “It leads me to believe we should be in the forefront—the absolute forefront—of effective multi-channel retailing. And we've got some work to do to get there.”

Schmults is committed to seeing that work pay off. “I'm not trying to have a big win in five years and then get out,” he says. “I want to make sure that whenever I leave I pass this brand on in very good shape, and able to survive another 100 years.”

Editor's note: To read more from our interview with FAO's Ed Schmults, visit us on the Web at www.playthings.com/edschmults.