Fairway Group Holdings Corp (NASDAQ:FWM), the parent company of Fairway Market, today announced financial results for its fiscal 2016 second quarter ended September 27, 2015.

Second Quarter Fiscal 2016 Highlights

  • Net sales of $179.8 million
  • Adjusted EBITDA of $5.6 million
  • Gross margin of 30.9%
  • Cash and Cash Equivalents of $29.9 million

Jack Murphy, Fairway Market’s Chief Executive Officer said, “Despite the seasonal challenges of our lowest volume quarter, we continued to see tangible progress in a number of key operational areas. We believe we have tightened up operations and improved the cost structure across our stores as well as at Central Services. This progress is reflected in the second quarter results, as our Adjusted EBITDA increased on a year-over-year basis, excluding a one-time benefit of $1.2 million during last year’s second quarter, despite a sales decline of approximately $14.0 million.”

Operating Results for the Second Quarter of Fiscal 2016

Net sales were $179.8 million for the second quarter of fiscal 2016 compared to $194.0 million for the second quarter of fiscal 2015.   The decrease in net sales was primarily due to lower same store sales and lower net sales from the new store that opened during the second quarter of fiscal 2015 due to the typical higher than normal net sales we experienced during the grand opening period. Promotional activity during the second quarter of fiscal 2016 was approximately $0.8 million, compared to $0.3 million during the same period of the prior year.

Same store sales decreased 6.5% for the second quarter of fiscal 2016 compared to the second quarter of fiscal 2015. Customer transactions at our comparable stores decreased by 9.2%, although the average transaction size increased by 3.0% compared to the second quarter of last year. Same store sales were negatively impacted by approximately 140 basis points due to the competitive opening near our Upper Eastside location in February 2015 and approximately 30 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 4.8%.

Adjusted EBITDA was $5.6 million for the second quarter of fiscal 2016 compared to $6.7 million for the second quarter of fiscal 2015. Adjusted EBITDA for the second quarter of fiscal 2015 included a $1.2 million benefit in connection with the accelerated recognition of a deferred vendor discount resulting from the early termination of the related vendor contract due to vendor non-performance. Excluding this one-time benefit, Adjusted EBITDA for the second quarter of fiscal 2015 was $5.5 million. Adjusted EBITDA in the second quarter of fiscal 2016 was negatively impacted by lower contribution from the Upper Eastside location, higher promotional activity and an increase in Central Services in comparison to the second quarter of fiscal 2015.

The Adjusted EBITDA margin was 3.1% for the second quarter of fiscal 2016 compared to 3.4% during the second quarter of fiscal 2015 (2.8% if the one-time benefit of $1.2 million is excluded).

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

Adjusted EBITDA Reconciliation1
Thirteen Weeks Ended
September 27, September 28,
2015 2014
% of   % of
  Net Sales   Net Sales
(dollars in thousands)
Net loss $ (12,018) (6.7)% $ (17,235) (8.9)%
Interest expense, net (a) 4,746 2.6 4,833 2.5
Income tax provision 619 0.3 940 0.5
Store depreciation and amortization 6,105 3.4 6,218 3.2
Corporate depreciation and amortization 773 0.4 981 0.5
Non-operating expenses (b) 21 0.0 31 0.0
Equity compensation charge 2,061 1.1 4,155 2.1
Store opening costs 1,289 0.7 2,676 1.4
Production center start-up costs 470 0.3 1,741 0.9
Professional services (b) 303 0.2 815 0.4
Severance (c) 1,223 0.7 869 0.4
Pre-opening advertising costs 639 0.3
Adjusted EBITDA $ 5,592 3.1% $ 6,663 3.4%

(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.

(c) Represents severance charges related to our organizational realignment, including payments required to be paid under agreements in connection with the separation of certain of our former executive officers.

Other Operating Items

Gross profit for the second quarter of fiscal 2016 was $55.5 million compared to $59.3 million in the same period of the prior year. Gross profit for the second quarter of fiscal 2015 included a $1.2 million benefit in connection with the accelerated recognition of a deferred vendor discount resulting from the early termination of the related vendor contract due to vendor non-performance.

The gross margin increased approximately 30 basis points to 30.9% in the second quarter of fiscal 2016 from 30.6% in the prior year. Excluding the one-time benefit of $1.2 million in the second quarter of fiscal 2015, gross margin increased 90 basis points to 30.9% for the second quarter of fiscal 2016 from 30.0% 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, decreased $3.0 million to $45.5 million for the second quarter of fiscal 2016 from $48.6 million for the second quarter of fiscal 2015. The decrease in store expenses was attributable to continued improvements in labor productivity and enhanced cost discipline. Store expenses, excluding depreciation and amortization, were 21.9% of sales for both the second quarter of fiscal 2016 and fiscal 2015.

General and administrative expenses were $14.9 million for second quarter of fiscal 2016, a decrease of $2.8 million from $17.7 million for the second quarter of fiscal 2015. The decrease in general and administrative expenses was primarily due to a decrease in equity compensation expense, pre-opening advertising and professional services, partially offset by an increase in severance expense. The Central Services component of general and administrative expenses increased $0.3 million to $10.5 million for second quarter of fiscal 2016 compared to the same period in the prior year.

General and administrative expenses, as a percentage of net sales, decreased to 8.3% for second quarter of fiscal 2016, from 9.1% for second quarter of fiscal 2015.

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

Central Services Reconciliation2
Thirteen Weeks Ended
September 27, September 28,
2015 2014
% of % of
  Net Sales Net Sales
(dollars in thousands)
General and administrative expenses $ 14,882 8.3% $ 17,727 9.1%
Non-operating expenses (21) (31)
Equity compensation charge (2,061) (1.1) (4,155) (2.1)
Corporate depreciation and amortization (773) (0.4) (981) (0.5)
Professional services (303) (0.2) (815) (0.4)
Severance (1,223) (0.7) (869) (0.4)
Pre-opening advertising costs (639) (0.3)
Central services $ 10,501 5.8% $ 10,237 5.3%

Store opening costs were $1.3 million for the second quarter of fiscal 2016, a decrease of approximately $1.4 million from $2.7 million for the second quarter of fiscal 2015. Approximately $0.1 million and $1.2 million of store opening costs for the second quarter of fiscal 2016 and the second quarter of fiscal 2015, respectively, did not require the expenditure of cash in the period, primarily due to deferred rent.

Start-up costs for the new production center in the Hunts Point area of the Bronx were $0.5 million for second quarter of fiscal 2016, a decrease of approximately $1.3 million from $1.7 million for the second quarter of fiscal 2015. Approximately $0.1 million of these costs for the second quarter of fiscal 2015 did not require the expenditure of cash in the period, primarily due to deferred rent.

We recorded an income tax provision of $0.6 million for the second quarter of fiscal 2016 compared to a provision of $0.9 million for the second quarter of fiscal 2015. We record an income tax provision although we incur pretax losses in both periods because we do not record any income tax benefit related to the operating losses and recognize income tax expense related to indefinite-lived intangible assets. Our 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.

Our net loss was $12.0 million for the second quarter of fiscal 2016, a decrease of $5.2 million, from a net loss of $17.2 million for the second quarter of fiscal 2015. The decrease in net loss was due to a decrease in direct store expenses, general and administrative expenses, store-opening costs, production center start-up costs and income tax provision, partially offset by a reduction in gross profit. Our adjusted net loss was $6.5 million for the second quarter of fiscal 2016, a decrease of $2.6 million compared to an adjusted net loss of $9.1 million for the second quarter of fiscal 2015.

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

Net Loss Reconciliation3
Thirteen Weeks Ended
September 27, September 28,
2015 2014
% of % of
  Net Sales   Net Sales
(dollars in thousands)
Net loss $ (12,018) (6.7)% $ (17,235) (8.9)%
Non-operating expenses 21 31
Equity compensation charge 2,061 1.1 4,155 2.1
Income tax provision 619 0.3 940 0.5
Non-cash interest 1,288 0.7 1,279 0.7
Professional services 303 0.2 815 0.4
Severance 1,223 0.7 869 0.4
Adjusted net loss $ (6,503) (3.6)% $ (9,146) (4.7)%

Other Items

  • The Company ended the quarter with approximately $36.9 million of liquidity, which included $29.9 million of cash and $7.0 million in borrowing capacity under the senior credit facility. Subsequent to the end of the quarter, outstanding letters of credit were increased by $0.5 million in aggregate, decreasing our borrowing availability under the 2013 Senior Credit Facility to $6.5 million.
  • Although we believe we have sufficient liquidity and capital resources to meet our current operating requirements and to open the stores currently scheduled to open in calendar 2016, in light of our leverage profile and the constraints that places on our longer-term growth strategy, we are currently exploring alternatives to raise additional capital to allow us to de-lever the balance sheet and fund additional growth initiatives, including investments to rebuild sales and pursuing new stores opportunistically. Any new growth capital investment, or capital raised in the context of an equity cure, is likely to be in the form of equity or equity linked securities, and is likely to be dilutive to existing stockholder ownership. There can be no assurance that we will be successful in obtaining additional capital on favorable terms or at all. (Original Source)

Shares of Fairway Group Holdings shares closed today at $1.82, up $0.11 or 6.43%. FWM has a 1-year high of $7.81 and a 1-year low of $1.01. The stock’s 50-day moving average is $1.54 and its 200-day moving average is $3.23.

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.