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Fairway Posts Mixed Q1 Results

Fairway Group Holdings Corp., the New York-based parent company of Fairway Market, reported net sales of $193.8 million for Q1 of fiscal 2016, compared with $198.3 million in Q1 of fiscal 2015. The company's adjusted EBITDA came in at $9.1 million, versus $11.1 million in the year-ago period, but gross margin was 31.5 percent, a 50-basis-point rise from last year's 31 percent.

However, the company posted a net loss of $13.9 million in Q1, versus $9.7 million in the year-ago period. Fairway explained the wider net loss as the result of an increase in general and administrative expenses related to its Hudson Yards transaction (regarding a development on the West Side of Manhattan, where the company is planning a store), promotional activities, and income tax expense. The adjusted net loss was $3.9 million for Q1 2016 compared with $3.1 million last year.

"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," said Jack Murphy, CEO of Fairway Market, which currently operates 15 stores in New York, New Jersey and Connecticut. "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."

Fairway Operating Results

During Q1 2016, as Murphy pointed out, Fairway invested in increased promotional activity, particularly to develop its digital customer engagement strategy. Same-store sales declined 5.3 percent compared with the year-ago period, and customer transactions in comparable stores plunged 7.4 percent, although the average transaction size grew 2.3 percent from last year.

Noted Murphy: "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 percent. We are, however, seeing some positive developments in several of our suburban locations from our efforts."

Fairway's adjusted EBITDA margin was 4.7 percent for Q1, compared with 5.6 percent during the year-ago period. The grocer attributed this drop to higher promotional activity, lower contribution from its Upper East Side location (which was affected by the aforementioned competitive opening) and an increase in central services.

Q1 gross profit was $60.9 million, versus $61.4 million last year. According to Fairway, the increase in gross margin was because of a higher merchandise margin as a result of improved shrink management and price optimization, partly offset by a rise in occupancy costs, as a percentage of sales.

Despite a decidedly mixed quarterly performance, Murphy remained upbeat. "The Fairway team is … engaged in development and design activities for new Fairway locations, and we 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," he said. "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."

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