NEW YORK (CNN/Money) - Children's specialty retailer FAO Inc. warned Friday it expects to miss previously issued sales and earnings estimates for the year because of a sluggish economy.

The operator of the FAO Schwarz chain as well as Zany Brainy and The Right Start did not provide specific numbers, but said a sluggish economy hurt third-quarter results and is now having an impact on the fourth quarter. This will force it to lower 2002 forecasts when it reports third-quarter results in mid-December.

The company also said it plans to update 2003 guidance after evaluating the fourth quarter and economic outlook.

Shares of King of Prussia, Pa.-based FAO Inc (FAOO: down $0.48 to $2.27, Research, Estimates) slipped 36 cents to $2.39 in Friday's shortened session.

The company blamed restrained consumer spending and a weak economic environment in the third quarter that has continued into the fourth.

FAO's warning comes as retailers brace for what could be a tough holiday season if consumers choose to spend less amid a sluggish economy and jitters about unemployment and a possible war with Iraq.

Specialty toy retailers also are being squeezed by increased competition from discount chains such as Wal-Mart Stores and Target Corp. as well as a difficult economy.

FAO CEO Jerry Welch said the company remains pleased with its strategy of placing full-size Right Start stores within existing Zany Brainy stores. To date, the company has 95-100 Right Start boutiques in Zany Brainy stores and expects them to have a positive effect next year.

Welch also said the company's major merchandising initiatives, such as adding car seats, Barbie dolls and action figures to Zany Brainy, adding strollers to FAO Baby and FAO Schwarz, and plush toys to Zany Brainy and Right Start have begun to have a positive impact on sales.

Also helping sales is a company-wide store redesign. But Welch said these initiatives would not be enough to meet previously issued forecasts.

FAO was formed when The Right Start acquired Zany Brainy, a foundering retailer specializing in educational toys, in September 2001. In January, the company acquire the 140-year-old FAO Schwarz chain known for its flagship store on New York's Fifth Ave.