A valuable lesson

We are not going under,” says Debra Fine, Small World Toys' CEO, in response to talk that the specialty toy manufacturer and distributor she bought just two years ago is in peril.

“We know that's the rumor,” she tells Playthings. “Because I believe that actions speak louder than words, we'll just have to show that [it's not true] during the third and fourth quarter.”

For Fine and the rest of Small World, the last year has been what she calls “an interesting time.” Heading into the 2005 holiday season, the Culver City, Calif.-based company looked to be positioned for what casual observers would have considered the basis for a rapidly evolving future—two straight years of double-digit sales gains, a successful acquisition of Neurosmith's line of electronic learning products, and what seemed like a solid plan to expand its product offerings further towards the tween market with the purchase of craft kit maker The Bead Shop. But that momentum abruptly went into reverse and the shift, Fine admits, was mostly self-created.

“We ran into some issues last year when Eddy [Goldwasser, Small World Toys' founder] transitioned out,” Fine says. “Eddy used to order all of the inventory and after he transitioned out of that role last year, the person we chose to take up that role over-ordered on a tremendous amount of product—product we weren't going to be selling.”

The result was $2 million worth of toys that Small World's retail accounts hadn't ordered. “We had plenty of product,” says Fine, “just not what our customers wanted! It was a big hiccup and it cost us that $2 million.”

Despite its growth since Fine purchased the company, Small World is still small enough to feel the effects of that $2 million mistake acutely. The company is doing something few in the specialty toy market have tried: negotiating the highs and lows of the specialty toy market under the watchful eye of Wall Street.

“Being public is difficult,” Fine says. “We would be very, very profitable, except being public costs us about $1.5 million a year—and for a small-sized company that's extremely difficult unless you're doing $100 million in revenue.”

And that's where The Bead Shop purchase would have come in, Fine says. “Our goal has been to merge with or buy another company that's very synergistic, with high-quality product, and that gets us to the $100 million mark in sales.” In the end, though, Fine wasn't able to raise enough cash earlier this year to seal the deal.

“We were able to raise $10 million but the arrangement was that we'd pay The Bead Shop $15 million. It took months of time to raise $10 million, which was fantastic, but when the other person wants $15 million, having raised $10 million doesn't matter,” she says.

“We still want to join our two companies,” she continues. “We're still talking about it, but either we need to meet in the middle somewhere or do a complete merger and each take half the company.”

In the meantime, Fine continues to look for product lines that “really make sense for us,” but has focused Small World's resources for the rest of 2006 and the foreseeable future to service its specialty retail accounts in “any single way that we can because we have a lot to prove back to them.”

“We really did not ship well in the first quarter and the second quarter's been spotty,” Fine admits. “We're just now getting in all the product they wanted. We've had 40 years of reputation and service and then we had a bad hiccup, and we need to show [retailers]—instead of tell them—that we're still the same company.”

By the middle of last month, Fine says, product was beginning to arrive in the U.S. She expects that by the middle of July, retailers should start to get their overdue orders, which was mostly spring 2006 merchandise— “the stuff you absolutely have to ship in February.”

Fine says that for 2007, “we're going to have every bit of our new spring inventory in by December of this year.”

And thanks to a recent debt restructuring and a new credit facility, the ongoing transition of Small World from its more than 40 year roots as a distributor of products sourced from abroad to a full-scale toy manufacturer with a base of proprietary brands will continue.

“We spent a couple million dollars in product development last year,” Fine says, “but it takes at least a year before we'll start seeing the sales. [In the meantime,] we bought Neurosmith, with their very high-end electronic products; we bought Imagiix as a product line and started beefing up our own brands. And under our distribution arm, SW Express, we're still bringing in great products. We know that our retailers depend on us for that.”