Stock Update (NASDAQ:FWM): Fairway Group Holdings Corp Reports First Quarter Results


Fairway Group Holdings Corp (NASDAQ:FWM), the parent company of Fairway Market, announced financial results for its fiscal 2016 first quarter ended June 28, 2015.

First Quarter Fiscal 2016 Highlights

  • Net sales of $193.8 million
  • Adjusted EBITDA of $9.1 million
  • Gross margin of 31.5%

Jack Murphy, Fairway Market’s Chief Executive Officer said, “I am pleased with our performance this quarter in a number of important operational areas including our gross margin which was driven by better selling margins and improved shrink. We also performed well on expenses with progress in labor management and other expense categories. Importantly, we also strategically invested approximately $2.8 million to launch advertising, promotional and customer acquisition campaigns that we believe will eventually benefit our top line.

Our same store sales performance in the quarter was impacted by a New York City-based competitive opening and an increase in promotional activity. Excluding these items, our same store sales for the quarter were down approximately 2.3%. We are, however, seeing some positive developments in several of our suburban locations from our efforts.

The Fairway team is also engaged in development and design activities for new Fairway locations andwe expect many of these elements will be reflected in our new store in the Mill Basin area of Brooklyn, which is scheduled to open in mid-2016. We believe the new format will result in great shopping benefits for our customers while also generating solid returns for Fairway. The new store format, improved gross margin and labor performance and the strategic actions to build our customer base are all important efforts in our long-term improvement plan for Fairway.”

Operating Results for the First Quarter of Fiscal 2016

Net sales were $193.8 million for the first quarter of fiscal 2016 compared to $198.3 million for the first quarter of fiscal 2015. During the quarter, we invested approximately $2.8 million, or 1.4% of sales, for increased promotional activity, in large part related to the continued development of our digital customer engagement strategy, reducing sales by this amount. Same store sales decreased 5.3% for the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015. Customer transactions in our comparable stores decreased by 7.4%, although the average transaction size increased by 2.3% compared to the first quarter of last year. Same store sales were negatively impacted by approximately 170 basis points due to a recent competitive opening near our Upper Eastside location and approximately 130 basis points due to increased promotional activity. Excluding the impact of the Upper Eastside location and the increased promotional activity, same store sales decreased approximately 2.3%.

Adjusted EBITDA was $9.1 million for the first quarter of fiscal 2016 compared to $11.1 million in the first quarter of fiscal 2015. The Adjusted EBITDA margin was 4.7% for the first quarter of fiscal 2016 compared to 5.6% during the same period of the prior year. Adjusted EBITDA in the first quarter was negatively impacted by higher promotional activity, lower contribution from the Upper Eastside location and an increase in Central Services.

The following table sets forth a reconciliation to Adjusted EBITDA from Net Loss:

Adjusted EBITDA Reconciliation1
Thirteen Weeks Ended
June 28, June 29,
2015 2014
% of % of
Net Sales Net Sales
(dollars in thousands)
Net loss $ (13,934)  (7.2)% $ (9,694)  (4.9)%
Interest expense, net (a)  4,855  2.5  4,778  2.4
Income tax provision  2,158  1.1  945  0.5
Store depreciation and amortization  6,248  3.2  6,020  3.0
Corporate depreciation and amortization  841  0.4  1,036  0.5
Non-operating expenses (b)  3,761  1.9  —  0.0
Equity compensation charge  2,417  1.2  2,857  1.4
Store opening costs  1,272  0.7  1,686  0.9
Production center start-up costs  1,087  0.6  1,429  0.7
Professional services (c)  295  0.2  704  0.4
Severance (d)  108  0.1  767  0.4
Pre-opening advertising costs  —  —  604  0.3
Adjusted EBITDA $ 9,108  4.7% $ 11,132  5.6%
(a)  Includes amortization of deferred financing costs and original issue discount.
(b)  Consists of charges that were incurred and associated with discrete and different events that do not relate to and are not indicative of our core on-going operations not related to professional services. Includes approximately $3.7 million for the thirteen weeks ended June 28, 2015 related to the termination of the lease for our former Hudson Yards location, where the Company had expected to open a store in late calendar 2015 or early calendar 2016. In connection with the lease termination, the Company has negotiated a limited, conditional right of first negotiation if the developer determines to include a supermarket in the second phase of the Hudson Yards development. The Company paid the landlord a total of $3.5 million in connection with the lease termination.
(c)  Consists of charges that were incurred and associated with discrete events that do not relate to and are not indicative of our core on-going operations, including litigation and recruitment fees, among others.
(d)  Represents severance charges related to our organizational realignment.

Other Operating Items

Gross profit for the first quarter of fiscal 2016 was $60.9 million compared to $61.4 million in the same period of the prior year. The gross margin increased approximately 50 basis points to 31.5% from 31.0% in the prior year. The increase in gross margin was driven by a higher merchandise margin as a result of improved shrink management and price optimization, partially offset by an increase in occupancy costs, as a percentage of sales.

Store expenses, excluding depreciation and amortization, increased $0.3 million to $41.3 million for the first quarter of fiscal 2016 from $40.9 million for the first quarter of fiscal 2015. The increase in store expenses was attributable to an increase in the number of stores in operation during the period. Store expenses for stores open in both periods decreased $1.5 million in the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015, primarily due to continued improvements in labor productivity and enhanced cost discipline. Store expenses were 21.3% of sales for the first quarter of fiscal 2016 compared to 20.6% for the first quarter of fiscal 2015.

General and administrative expenses were $18.0 million for the first quarter of fiscal 2016, an increase of $2.7 million, or 17.7%, from $15.3 million for the first quarter of fiscal 2015. The increase in general and administrative expenses was due to $3.8 million in non-operating expenses, primarily attributable to costs related to the termination of the lease for our former Hudson Yards location. Excluding this cost, general and administrative expenses were $14.3 million for the first quarter of fiscal 2016, a decrease of $1.0 million, or 6.5%, from $15.3 million for the first quarter of fiscal 2015. The increase in general and administrative expenses was partially offset by lower severance, professional services, equity compensation and pre-opening advertising expenses. The portion of depreciation and amortization included in general and administrative expense was $0.8 million for the first quarter of fiscal 2016, a decrease of $0.2 million from $1.0 million for the first quarter of fiscal 2015. The Central Services component of general and administrative expenses increased $1.3 million for the first quarter of fiscal 2016 compared to the same period in the prior year.

The following table sets forth a reconciliation to Central Services from General and Administrative expenses:

Central Services Reconciliation2
Thirteen Weeks Ended
June 28, June 29,
2015 2014
% of % of
Net Sales Net Sales
(dollars in thousands)
General and administrative expenses $ 18,000  9.3%  $ 15,295  7.7%
Non-operating expenses  (3,761)  (1.9)  —  —
 14,239  7.3  15,295  7.7
Equity compensation charge  (2,417)  (1.2)  (2,857)  (1.4)
Corporate depreciation and amortization  (841)  (0.4)  (1,036)  (0.5)
Professional services  (295)  (0.2)  (704)  (0.4)
Severance  (108)  (0.1)  (767)  (0.4)
Pre-opening advertising costs  —  —  (604)  (0.3)
Central services  $ 10,578  5.5%  $ 9,327  4.7%

Store opening costs were $1.3 million for the first quarter of fiscal 2016, a decrease of $0.4 million from $1.7 million for the first quarter of fiscal 2015. Approximately $0.5 million and $0.4 million of store opening costs for the first quarter of fiscal 2016 and the first quarter of fiscal 2015, respectively, did not require the expenditure of cash in the period due to deferred rent.

Start-up costs for the new production center in the Hunts Point area of the Bronx were $1.1 million for the first quarter of fiscal 2016, a decrease of $0.3 million from $1.4 million for the first quarter of fiscal 2015. Approximately $0.4 million of these costs for the first quarter of fiscal 2015 did not require the expenditure of cash in the period due to deferred rent.

The income tax provision was $2.2 million for the first quarter of fiscal 2016 compared to an income tax provision of $0.9 million for the first quarter of fiscal 2015. The income tax provision was recorded despite incurring a pre-tax loss because the Company does not record any income tax benefit related to operating losses but recognizes income tax expense related to indefinite-lived intangibles assets. The Company’s current expectation of the income tax provision for the full year is in the range of approximately $3.5 million to $4.0 million, which is expected to be primarily non-cash.

The net loss was $13.9 million for the first quarter of fiscal 2016, compared to a net loss of $9.7 million for the first quarter of fiscal 2015. The increase in the net loss was primarily attributable to an increase in general and administrative expenses related to the Hudson Yards transaction, promotional activities and income tax expense. The adjusted net loss was $3.9 million for the first quarter of fiscal 2016 compared to an adjusted net loss of $3.1 million for the first quarter of fiscal 2015.

The following table sets forth a reconciliation to Adjusted Net Loss from Net Loss:

Net Loss Reconciliation3
Thirteen Weeks Ended
June 28, June 29,
2015 2014
% of % of
Net Sales Net Sales
(dollars in thousands)
Net loss $ (13,934)  (7.2)%  $ (9,694)  (4.9)%
Non-operating expenses  3,761  1.9  —  0.0
Equity compensation charge  2,417  1.2  2,857  1.4
Income tax provision  2,158  1.1  945  0.5
Non-cash interest  1,286  0.7  1,276  0.6
Professional services  295  0.2  704  0.4
Severance  108  0.1  767  0.4
Adjusted net loss  $ (3,909)  (2.0)%  $ (3,145)  (1.6)%

Other Items

  • The Company ended the quarter with approximately $42.6 million of liquidity, which included $32.2 million of cash and $10.4 million in borrowing capacity under the senior credit facility. Subsequent to June 28, 2015, outstanding letters of credit were increased by $3.0 million in aggregate, decreasing our borrowing availability under the 2013 Senior Credit Facility to $7.4 million.

                                    

1 See the discussion under “Supplemental Non-GAAP Disclosure” below for an explanation of Adjusted EBITDA

2 See the discussion under “Supplemental Non-GAAP Disclosure” below for an explanation of Central Services

3 See the discussion under “Supplemental Non-GAAP Disclosure” below for an explanation of adjusted net loss (Original Source)

Shares of Fairway Group Holdings closed today at $3.00, down $0.02 or 0.66%. FWM has a 1-year high of $7.81 and a 1-year low of $2.12. The stock’s 50-day moving average is $3.47 and its 200-day moving average is $4.80.

On the ratings front, Jefferies Co. analyst Mark Wiltamuth maintained a Buy rating on FWM, with a price target of $5.25, in a report issued on May 27. The current price target represents a potential upside of 76.2% from where the stock is currently trading. According to TipRanks.com, Wiltamuth has a total average return of -8.3%, a 39.1% success rate, and is ranked #3529 out of 3724 analysts.

Fairway Group Holdings Corp along with its subsidiaries operates in the retail food industry. The Company sells fresh, natural and organic products, prepared foods and hard to find specialty and gourmet offerings.