RIGHT START POSTS LOSS UPSCALE TOY RETAILER EXPECTS TO SHOW PROFIT FOR FULL YEAR.

Byline: Brent Hopkins Staff Writer

CALABASAS - Upscale toy retailer The Right Start Inc. posted a $9.9 million third-quarter loss Tuesday but said it expects to show a profit for the full year.

The loss equals $4.07 per share versus net income of $1 million, or 15 cents a share, in the 2000 third quarter.

Sales for the quarter were $57 million versus $9.8 million in the year ago period.

The big sales increase reflects the purchase last summer of the struggling speciality chain Zany Brainy. Right Start paid $11.7 million in cash for the chain and assumed $85 million of its debt.

Zany Brainy's operations accounted for $7.1 million of the third-quarter loss, including nearly $1 million in charges for integration and closing of unprofitable stores.

However, The Right Start's same store sales dropped 5.8 percent during the quarter and Zany Brainy's fell 6.4 percent, indicative of a generally week retail sector.

Despite the loss, Right Start Chief Executive Officer Jerry Welch believes the company will be back in the black by the end of the year. The crucial holiday season has been kind to the company thus far, a sentiment not echoed by many large retailers.

``At the end of the day, while most areas of retail are suffering, people are still buying holiday items for their kids,'' he said. ``The ones that are hurting are the big ticket items, so we've benefited all around from the new focus.''

In years past, shoppers were more likely to splurge on expensive fare, lavishing pricey gifts such as expensive clothes and jewelry on their spouses.

According to David Unter, a manager for Deloitte & Touche's Consumer Business group, this has been pushed to the sidelines in favor of family oriented items such as The Right Start's upscale toys and clothes.

``Toys are a fundamental Christmas item, so they'll bode better than apparel and luxury,'' Unter said. ``The terrorist incidents have brought more focus to the family, so people don't want to sacrifice the kids' presents. Parents may tighten the purse strings for themselves, but they'll still spend on their kids.''

This has been reflected in The Right Start's sales traffic, Welch said.

``Our fourth quarter is coming along quite well,'' he said. ``Given the environment, we've been very tight in inventory and expense control. We really had the luxury of being able to plan on a fourth quarter where we'd be very cautious.''

Things should continue to improve in coming months as the chain completes its high-profile acquisition of FAO Schwarz in January. The Right Start purchased the flagging premium toy vendor in late November, acquiring only its profitable, high-performance locations.

``Clearly, they've defined their niche for the place for high-end merchandise,'' said Jim Silver, publisher of the industry trade Toy Book. ``The Right Start purchased the FAO stores because it's the Tiffany's of the toy business, and with the stores they bought, the customers are still there. They got the right ones in the right locations.''

The integration of the chains has gone smoothly, Welch said, preparing The Right Start for a strong 2002.

``We're already working together as if we were one,'' he said. ``We've got The Right Start for kids up to three, Zany's educational and development toys from three to 12, and with FAO, we've got the ultimate toy store, so we think we've triangulated the kids' market really well.''

CAPTION(S):

2 photos

Photo:

(1 -- color) A smiling Jessica Rips, 3, keeps busy playing with toys while her mother picks out items at The Right Start store in Tarzana.

(2 -- color) Debbie Jain, left, gets help from The Right Start manager Arlena Novak at the store's Tarzana location. The upscale toy retailer posted a $9.9 million third-quarter loss on Tuesday.

John McCoy/Staff Photographer