Fairway’s Q2 Sales Slip as Competition Grows

Fairway Group Holdings Corp., parent company of Fairway Market, posted net sales of $179.8 million for its fiscal 2016 second quarter ended Sept. 27, compared with $194 million for the year-ago period.

The New York-based specialty grocer attributed this decline primarily to lower same-store sales and lower net sales from a new store that opened during Q2 2015 and at that time experienced the typically higher-than-normal net sales of the grand-opening period.

Same-store sales fell 6.5 percent for Q2 2016, with customer transactions at Fairway's comparable stores decreasing by 9.2 percent, although the company pointed out that the average transaction size grew 3 percent over the year-ago period. According to Fairway, same store sales were negatively affected by a competitive opening near its Upper East Side location in February 2015 and increased promotional activity. Excluding those impacts, same-store sales declined about 4.8 percent. Promotional activity during Q2 was about $0.8 million, versus $0.3 million last year.

"Despite the seasonal challenges of our lowest-volume quarter, we continued to see tangible progress in a number of key operational areas," noted Jack Murphy, CEO of Fairway Market, which operates 15 stores in New York, New Jersey and Connecticut. "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."

Gross profit for Q2 was $55.5 million, compared with $59.3 million last year. Gross margin, meanwhile, increased to 30.9 percent, from 30.6 percent in the year-ago period. This increase was due to a higher merchandise margin following improved shrink management and price optimization, partly offset by an increase in occupancy costs, as a percentage of sales, Fairway said.

Building on the operational progress cited by Murphy, Fairway hopes to improve its fortunes through additional capital. "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," the company said.

"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," Fairway continued. "There can be no assurance that we will be successful in obtaining additional capital on favorable terms or at all."

Additionally, The New York Times has reported that the company plans a limted test of an e-commerce website in a bid to boost its finances and compete with the likes of e-tailers Blue Apron and FreshDirect.