Ruetsch Leaves Fairway After Disappointing Earnings Report

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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).