In its initial financial posting since becoming a publicly-traded company last April, Manhattan-based Fairway Group Holdings (Fairway Market) posted a $27.9 million loss in its first quarter, compared with a $3.9 million loss a year ago.
However, overall sales increased 21 percent to $187 million in the period ended June 30 and comparable store revenue was up 1.4 percent. Additionally, customer transactions were up 0.8 percent and basket size grew 0.5 percent.
“We are pleased to report strong operating results for the quarter, our first as a public company,” said Charles Santoro, Fairway’s executive chairman. “Fairway remains on track with our long-term strategy designed to expand our store count and increase our margins. We remain confident in our ability to execute these plans.”
CEO Officer Herb Ruetsch added, “We executed well this quarter with improved gross margin performance and good control of our operating expenses despite the added costs associated with being a public company.”
The company noted that its wider loss could be attributed to transaction expenses and fees related to the IPO, a change in the income tax provision and an increase in non-cash equity compensation. The adjusted net loss in the quarter was $2.4 million, compared to the adjusted net loss of $3.8 million in the first quarter of the prior year.
Fairway’s IPO issued approximately 15.7 million shares of common stock, including 2.3 million shares sold by existing stockholders. The high-volume merchant received approximately $158.8 million in net proceeds after the underwriting discount and expenses related to the IPO.
Fairway said it used the net proceeds to pay approximately $76.8 million of preferred dividends, $9.2 million to terminate a management agreement with Sterling Investment Partners and approximately $8.1 million to pay contractual bonuses. The remaining approximately $64.7 million is intended for new store growth and general corporate purposes. The retailer also charged $18.1 million of IPO related expenses to operating results in the first quarter of the current fiscal year.
Santoro and Ruetsch both addressed financial analysts about Fairway’s results and initiatives in a follow-up conference call on August 8.
Among the issues they commented on were the company’s newest store announcement (Hudson Yards), its recently opened store (July 24) in Chelsea, its upcoming new unit in Nanuet, NY this fall and the progress of its new 240,000 square foot central production facility in the Bronx.
Santoro noted that the he’s confident that despite its smaller footprint (17,000 square feet) the Chelsea store will perform well.
“We do expect that Chelsea’s productivity level will be very strong and fully on par with our other urban stores and well above our current company-wide sales average of approximately $1900 per square foot,” he stated.
Also generating excitement was the announcement the Fairway would become one of the prime tenants in one of the largest mixed use developments in the recent history of New York City.
“Hudson Yards is the next great New York neighborhood and we’re excited to be an integral part of the development of this world-class location, and to be an amenity and food destination for the huge numbers of workers, residents, neighbors and tourists who will visit Hudson Yards,” said, Santoro. “We continue to believe our growth prospects are outstanding in and around the tri-state NY, NJ and CT metro area.”
Fairway plans to open the 45,875-square-foot site (comparable in size to Fairway’s store on 86th St. and 2nd Ave.) on Manhattan’s West Side as early as 2015. It will occupy the ground floor retail space in the South Tower, adjacent to a spur of the High Line elevated park.
Santoro added that Fairway is negotiating another (yet undisclosed) new store lease in Manhattan for a late 2014-early 2015 opening and is also in “advanced negotiations for another (also not disclosed) suburban location that could open as soon as early 2014.
“Now let me turn the conversation over to our next scheduled store opening in Nanuet, NY,” Santoro said during the conference call. “This location is scheduled to open in the fall of calendar 2013 and we expect to complete the build out at or below our original construction budget and we believe we have the potential to open the store in advance of our initial target date of November 1, 2013, perhaps by a few weeks. Nanuet represents our 14th store and with Hudson Yards, and our two nearly completed leases, our backlog stands at an incremental three stores for a total of 17 stores.”
He then added. “As previously mentioned, we are also on track to commence operations at our new production center later this year. We believe that this facility will have the capacity to support approximately 30 stores in the Greater New York Metropolitan area and it is important for a variety of reasons, including potential labor optimization and fringe benefits which will help drive gross margins in the future.”
Chief executive Herb Ruetsch also updated the progress of Fairway’s new production center in the Bronx stating that construction of the new facility has begun and that the first stage of operations could begin early next year.
“ Phase I, which we had talked about earlier, is really produce cross-docking, its core bakery operations that would include bagels, baguettes, bread, things like that, and core commissary operations which are basically the food that you see spread through our deli showcases at our prepared food and hot bar mixes,” Reutsch explained to the financial analysts. “That’s Phase I and that’s really our first focus that will be completed I would say in the eight to nine months area we’ll have all those areas under our belt and in the facility and running. And that’s when we’ll start to see the margin benefit which will result from labor savings in our store operations and also from controls – inventory control, production control thereby yielding shrink benefits.
Phase II is really things like quality production, cheese packaging, dry fruit and nut packaging. Those types of items are very, very strong paybacks, as we’ve wanted this as a company. We’re going to accelerate that as quickly as possible at Phase II and there’re some Phase III operations and we’re going to move as quickly as possible.”
Fairway ended the quarter with approximately $91 million of liquidity, which included approximately $70 million of cash and cash equivalents and approximately $21 million in borrowing capacity under its senior credit facility.
