Fairway Group Holdings Corp. (Fairway Market) announced earlier this month that its chief executive officer Herbert Ruetsch will retire after 15 years with the company, including the past two years as CEO. Ruetsch will remain a special advisor to the company and continue to provide input into certain merchandising and product initiatives. Prior to joining Fairway in 1998, Ruetsch served in various financial positions with now defunct Grand Union for about 16 years. William “Bill” Sanford, president of Fairway, will assume the role of Fairway’s interim chief executive.
Additionally, the high-volume Manhattan-based merchant posted negative ID sales and a narrowing earnings loss in its third quarter ended December 29. 2013.
Concerning Ruetsch’s departure, Charles Santoro, executive chairman of Fairway, stated, “Herb Ruetsch has helped lead Fairway through a major transformation from a small family business into an iconic, growing specialty food retailer serving some 20 million customer visits annually in the tri-state area. All of us at Fairway would like to thank Herb for his many contributions to our success.”
He added, “Bill Sanford, our interim chief executive officer, brings continuity, strong leadership and organizational skills, and has also played a very important role in Fairway’s growth, development and success over his last five years at Fairway, including his previous roles as chief financial officer and most recently as president.”
Fairway also announced the promotions of Kevin McDonnell to co-president and chief operating officer and Edward Arditte to co-president and chief financial officer.
Santoro continued, “Kevin and Ed work very closely together and these promotions are designed to bolster and enhance operations and productivity initiatives as Fairway prepares to roll out its production center and important new store openings later this calendar year. Kevin has worked at Fairway for the past six years and has more than 30 years of experience in food retailing. Kevin will be responsible for all merchandising and store operations and Ed will assume responsibility for all other corporate functions. We believe that our senior leadership team is extraordinarily strong, focused and determined and that these changes help take us to the next level in our organization’s growth and in enhancing our ability to execute to very demanding goals.”
Sanford has served as Fairway’s president since April 2012. He joined the company in October 2008 as chief administrative officer and served as chief financial officer from September 2011 to December 2012. From 1998 to June 2008, he held various senior positions, including CFO, president and chief operating officer with Interline Brands, Inc. He has over 25 years of experience in the wholesale distribution field, having also held senior positions with Airgas and MSC Industrial Direct.
McDonnell has served as Fairway’s senior VP-chief operating officer since April 2012. Prior to this, he was chief merchandising officer from August 2007 to April 2012. Previously, he served in various capacities at A&P for over 27 years.
Arditte has served as executive VP and chief financial officer of Fairway since December 2012. He has over 25 years of finance and operating experience with large, multi-industry companies including Tyco International Ltd., where he served from May 2003 to May 2010 as a senior VP with responsibility for strategy, investor relations and communications. Immediately prior to joining Tyco International, he served as CFO of BancBoston Capital.
Fairway said its board of directors will commence a CEO search shortly, and noted that will consider qualified individuals, both inside and outside of Fairway, who possess the leadership, merchandising and organizational skills complementary to its long term goals and opportunities.
Fairway also provided an overview of its activities achieved during its third quarter. Those included: a net sales increase of 22.9 percent to $205.7 million; improvements in gross margin and merchandise margin; Adjusted EBITDA increased from $12.4 million to $12.8 million; customer transactions increased by 27.4 percent and excluding its Red Hook store in Brooklyn (which was closed for several months after damages incurred from Hurricane Sandy), customer transactions increased by 23.6 percent over the prior year; lease terms improved for its flagship location on 74th and Broadway; Fairway initiated organizational realignment designed to enhance productivity and streamline operations; and also noted that private label continued to grow as a percentage of sales.
Santoro noted: “During the quarter, we grew our revenues and market share, made progress on a number of long-term margin initiatives and enhanced the visibility of our real estate pipeline. While our business faced a number of headwinds during the quarter including a tougher comparison over last year, the compressed holiday shopping season and a generally softer retail backdrop, we remain excited about our long-term growth prospects. We have also strengthened our senior leadership structure, and announced several important promotions to enhance operations and productivity initiatives as Fairway evolves to the next level of growth and scale. Fairway’s differentiated food retail platform remains well positioned to capture incremental market share as we continue to expand our store base and capitalize on the shifting consumer focus towards healthy living and value.”
For the third quarter of fiscal 2014, net sales increased $38.4 million, or 22.9 percent, to $205.7 million from $167.3 million in the third quarter of fiscal 2013. Net sales growth in the quarter was driven primarily by the new stores opened subsequent to September 29, 2012 and the net sales from the Red Hook, Brooklyn location which was closed for the last nine weeks of the third quarter in the prior year. On a pro-forma basis to include the lost sales from the Red Hook store, net sales increased 14.3 percent in the quarter.
Adjusted EBITDA increased to $12.8 million in the third quarter of fiscal 2014 from $12.4 million in the third quarter of fiscal 2013. The increase was primarily due to the contribution from new stores and enhanced productivity in Central Services, which improved 70 basis points as a percent of sales in the quarter despite absorbing approximately $0.3 million in incremental public company costs. The adjusted EBITDA margin was 6.2 percent in the quarter compared to 6.9 percent on a pro forma basis in the same period of the prior year, after adding back the estimated lost sales at its Red Hook location. The adjusted EBITDA margin was adversely affected by, principally, lower than expected holiday sales during the second half of the quarter and higher expenses, as a percentage of sales, at its new stores, which is typical for new locations as they ramp to maturity, the company declared.
Gross profit for the quarter increased to $65.6 million from $53.2 million and the gross margin improved 10 basis points to 31.9 percent from 31.8 percent in the prior year. The increase in the gross margin was primarily due to an increase of approximately 50 basis points in the merchandise margin partially offset by higher occupancy costs as a percentage of sales.
General and administrative expenses for the third quarter increased $2.3 million to $16.6 million from $14.3 million in the third quarter of the prior year, primarily due to an increase in equity compensation expense and a $1.5 million contribution to the Fairway Community Foundation, partially offset by the elimination of management fees and a reduction in non-recurring and other expenses. The Fairway Community Foundation was established to coordinate and fund the company’s charitable community activities.
Fairway said that Central Services, a component of general and administrative expenses that directly relates to the operations of the business, was $9.4 million for the quarter, and relatively flat from the prior year, after absorbing approximately $0.3 million in incremental public company expenses which were largely offset by enhanced cost disciplines. Central Services, as a percentage of sales, decreased 70 basis points in the quarter to 4.6 percent, from 5.3 percent, on a pro forma basis, in the prior year after adjusting for the lost sales at the Red Hook location.
Store-opening costs in the quarter consisted of approximately $1.6 million for the Nanuet location which opened in October 2013, $0.4 million for the Lake Grove, NY location, which is expected to open in the late spring, and $0.1 million for its Chelsea location in Manhattan, which opened in July 2013. Total store opening costs decreased to $2.1 million in the quarter from $5.3 million in the prior year due to the timing of new store opening activities. In addition, the retailer incurred $1.4 million of start-up costs for the new production center. Approximately $0.4 million of production center start-up costs in the third quarter were non-cash, primarily due to deferred rent.
During the third quarter, Fairway stated recorded a valuation allowance against its remaining deferred tax assets and recorded an income tax provision of $25.4 million. In the prior year, the retailer recorded a partial allowance against its deferred tax assets and recorded an income tax provision of $35.1 million. Both charges are non-cash and do not impact Fairway’s ability to utilize its approximately $120 million of net operating losses against future taxable income through 2033.
The net loss in the quarter was $31.3 million, compared to a net loss of $44.5 million in the third quarter of the prior fiscal year. The adjusted net loss in the quarter was $2.2 million, a decrease of $3.6 million from the adjusted net loss of $5.8 million in the third quarter of the prior year.
The retailer has initiated an organizational realignment to remove redundant costs and streamline parts of the business model to enhance overall productivity. Net of reinvestments back into the business, Fairway said it expects to achieve annualized cost savings of approximately $3-4 million. In connection with the plan, the retailer said it expects to incur charges, primarily severance, over the next year of approximately $7.0 million.
During the quarter, the retailer settled the remaining portion of the insurance claims related to Hurricane Sandy and received final payments of $4.4 million and recorded a $3.1 million gain on storm-related insurance recoveries for the quarter.
Fairway ended the quarter with approximately $73 million of liquidity which includes $54 million of cash and $18 million in borrowing capacity under the senior credit facility.
The fast-growing retailer entered into an amended and restated lease for a portion of the occupied space at its Broadway store. The lease, as amended, extends the date after which the landlord has the option to terminate the lease in order to make substantial renovations to the existing building, or to construct a new building, from June 2017 to February 2029. The annual rent for this location increased by $1.2 million as a result of this extension. Following landlord renovation or construction of a new facility Fairway will retain the right to enter into a new lease.
Private label sales in the quarter were up approximately 100 basis points, as a percentage of sales, over the prior year.
Fairway currently operates 14 stores (11 in New York, two in New Jersey and one in Connecticut) and has three new units under development: Lake Grove, NY: and two Manhattan units ( in Tribeca and on the West Side in the new Hudson Yards complex).
