Fairway Group Holdings Corp
Fairway Group Holdings Corp (Form: 10-Q, Received: 11/07/2013 06:32:18)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 29, 2013

 

OR

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission File Number 001-35880

 

Fairway Group Holdings Corp.

(Exact name of registrant as specified in its charter)

 

Delaware

 

74-1201087

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

2284 12th Avenue

New York, New York 10027

(646) 616-8000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x Yes o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

Non-accelerated filer x

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   o Yes x No

 

As of October 31, 2013, the registrant had 25,970,126 shares of Class A common stock and 15,420,819 shares of Class B common stock outstanding .

 

 

 



Table of Contents

 

Fairway Group Holdings Corp.

Quarterly Report on Form 10-Q

For the thirteen and twenty-six weeks ended September 29, 2013

Table of Contents

 

Part I—Financial Information

 

 

 

Item 1. Financial Statements (Unaudited)

 

Consolidated Balance Sheets as of March 31, 2013 and September 29, 2013

 

Consolidated Statements of Operations for the thirteen and twenty-six weeks ended September 30, 2012 and September 29, 2013

 

Consolidated Statements of Cash Flows for the twenty-six weeks ended September 30, 2012 and September 29, 2013

 

Consolidated Statements of Changes in Redeemable Preferred Stock and Stockholders’ (Deficit) Equity for the twenty-six weeks ended September 29, 2013

 

Notes to Unaudited Consolidated Financial Statements

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Item 4. Controls and Procedures

 

 

 

Part II—Other Information

 

 

 

Item 1. Legal Proceedings

 

Item 1A. Risk Factors

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Item 3. Defaults Upon Senior Securities

 

Item 4. Mine Safety Disclosures

 

Item 5. Other Information

 

Item 6. Exhibits

 

Signatures

 

 

2



Table of Contents

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “forecast,” “continue,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected store openings, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

 

·                                           our ability to open new stores on a timely basis or at all;

 

·                                           our ability to achieve sustained sales and profitable operating margins at new stores;

 

·                                           the availability of financing to pursue our new store openings on satisfactory terms or at all;

 

·                                           our ability to compete effectively with other retailers;

 

·                                           our ability to maintain price competitiveness;

 

·                                           the geographic concentration of our stores;

 

·                                           ongoing economic uncertainty;

 

·                                           our ability to maintain or improve our operating margins;

 

·                                           our history of net losses;

 

·                                           ordering errors or product supply disruptions in the delivery of perishable products;

 

·                                           negative effects to our reputation from real or perceived quality or health issues with our food products;

 

·                                           restrictions on our use of the Fairway name other than on the East Coast and in California and certain parts of Michigan and Ohio;

 

·                                           our ability to protect or maintain our intellectual property;

 

·                                           the failure of our information technology or administrative systems to perform as anticipated;

 

·                                           data security breaches and the release of confidential customer information;

 

·                                           our ability to retain and attract senior management, key employees and qualified store-level employees;

 

·                                           rising costs of providing employee benefits, including increased healthcare costs and pension contributions due to unfunded pension liabilities;

 

·                                           our ability to renegotiate expiring collective bargaining agreements and new collective bargaining agreements;

 

·                                           changes in law;

 

·                                           additional indebtedness incurred in the future;

 

·                                           our ability to satisfy our ongoing capital needs and unanticipated cash requirements;

 

·                                           claims made against us resulting in litigation;

 

3



Table of Contents

 

·                                           increases in commodity prices;

 

·                                           severe weather and other natural disasters in areas in which we have stores, warehouses and/or production facilities;

 

·                                           wartime activities, threats or acts of terror or a widespread regional, national or global health epidemic;

 

·                                           changes to financial accounting standards regarding store leases;

 

·                                           our high level of fixed lease obligations;

 

·                                           impairment of our goodwill; and

 

·                                           other factors discussed under “Item 1A—Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013.

 

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations or cautionary statements are disclosed under the sections entitled “Item 1A—Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended March 31, 2013 and “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other cautionary statements that are made from time to time in our other filings with the Securities and Exchange Commission (“SEC”) and public communications. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties, and you should not rely upon forward-looking statements as predictions of future events.

 

We caution you that the important factors described in the Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations may not be all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially and adversely from those contained in any forward-looking statements we may make. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our,” “Fairway,” “Fairway Market,” “the Company,” “our business” and “our company” refer to Fairway Group Holdings Corp. and its consolidated subsidiaries as a combined entity.

 

4



Table of Contents

 

Part I — Financial Information

 

Item 1. FINANCIAL STATEMENTS

 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

 

 

March 31, 2013

 

September 29, 2013

 

 

 

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

21,723

 

$

58,802

 

Accounts receivable, net

 

2,553

 

5,200

 

Merchandise inventories

 

24,759

 

25,601

 

Insurance claims receivable

 

5,184

 

1,300

 

Income tax receivable

 

817

 

661

 

Prepaid rent

 

3,146

 

3,562

 

Deferred financing fees

 

1,580

 

1,743

 

Prepaid expenses and other

 

5,604

 

4,187

 

Deferred income taxes

 

915

 

443

 

Total current assets

 

66,281

 

101,499

 

PROPERTY AND EQUIPMENT, NET

 

126,958

 

140,767

 

GOODWILL

 

95,412

 

95,412

 

INTANGIBLE ASSETS, NET

 

25,729

 

25,582

 

DEFERRED INCOME TAXES

 

3,781

 

1,162

 

OTHER ASSETS

 

20,340

 

19,311

 

Total assets

 

$

338,501

 

$

383,733

 

LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ (DEFICIT) EQUITY

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Current portion of long-term debt

 

$

2,750

 

$

2,750

 

Accounts payable

 

39,399

 

39,951

 

Accrued expenses and other

 

18,360

 

15,440

 

Total current liabilities

 

60,509

 

58,141

 

NONCURRENT LIABILITIES

 

 

 

 

 

Long-term debt, net of current maturities

 

256,563

 

253,423

 

Other long-term liabilities

 

22,629

 

26,712

 

Total liabilities

 

339,701

 

338,276

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

REDEEMABLE PREFERRED STOCK

 

 

 

 

 

Series A Preferred Stock, $0.001 par value per share, 52,982 shares authorized at March 31, 2013 and 0 shares authorized at September 29, 2013 and 43,058 shares issued and outstanding at March 31, 2013 and 0 shares issued and outstanding at September 29, 2013 (inclusive of cumulative deemed dividends of $28,353 and $0 at March 31, 2013 and September 29, 2013, respectively)

 

84,328

 

 

Series B Preferred Stock, $0.001 par value per share, 64,018 shares authorized at March 31, 2013 and 0 shares authorized at September 29, 2013 and 64,016.98 shares issued and outstanding at March 31, 2013 and 0 shares issued and outstanding at September 29, 2013 (inclusive of cumulative deemed dividends of $85,899 and $0 at March 31, 2013 and September 29, 2013, respectively)

 

149,916

 

 

Total redeemable preferred stock

 

234,244

 

 

STOCKHOLDERS’ (DEFICIT) EQUITY

 

 

 

 

 

Class A common stock, $0.00001 par value per share, 150,000,000 shares authorized, 12,506,885 and 26,043,479 shares issued at March 31, 2013 and September 29, 2013, respectively

 

 

 

Class B common stock, $0.001 par value per share, 31,000,000 shares authorized, 0 shares and 15,470,720 shares issued and outstanding at March 31, 2013 and September 29, 2013, respectively

 

 

15

 

Treasury stock at cost, 136,485 shares and 132,858 shares at March 31, 2013 and September 29, 2013, respectively

 

(1,500

)

(1,460

)

Additional paid-in capital

 

 

365,146

 

Accumulated deficit

 

(233,944

)

(318,244

)

Total stockholders’ (deficit) equity

 

(235,444

)

45,457

 

Total liabilities, redeemable preferred stock and stockholders’ (deficit) equity

 

$

338,501

 

$

383,733

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

5



Table of Contents

 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

 

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

 

 

September 30,
2012

 

September 29,
2013

 

September 30,
2012

 

September 29,
2013

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

160,510

 

$

183,215

 

$

315,193

 

$

369,993

 

 

 

 

 

 

 

 

 

 

 

Cost of sales and occupancy costs (exclusive of depreciation and amortization)

 

108,631

 

123,845

 

212,627

 

249,223

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

51,879

 

59,370

 

102,566

 

120,770

 

 

 

 

 

 

 

 

 

 

 

Direct store expenses

 

38,504

 

45,470

 

72,988

 

89,602

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

15,773

 

15,067

 

28,194

 

49,009

 

 

 

 

 

 

 

 

 

 

 

Store opening costs

 

5,530

 

3,911

 

11,304

 

6,897

 

 

 

 

 

 

 

 

 

 

 

Production center start-up costs

 

 

1,343

 

 

1,841

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(7,928

)

(6,421

)

(9,920

)

(26,579

)

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(5,785

)

(4,999

)

(10,369

)

(10,384

)

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(13,713

)

(11,420

)

(20,289

)

(36,963

)

 

 

 

 

 

 

 

 

 

 

Income tax benefit (provision)

 

5,886

 

(804

)

8,581

 

(3,207

)

 

 

 

 

 

 

 

 

 

 

Net loss

 

(7,827

)

(12,224

)

(11,708

)

(40,170

)

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

8,064

 

 

14,746

 

44,130

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(15,891

)

$

(12,224

)

$

(26,454

)

$

(84,300

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

 

$

(1.29

)

$

(0.30

)

$

(2.15

)

$

(2.23

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

12,331,157

 

41,248,805

 

12,320,567

 

37,723,426

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

6



Table of Contents

 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Twenty-Six Weeks Ended

 

 

 

September 30, 2012

 

September 29, 2013

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net loss

 

$

(11,708

)

$

(40,170

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities

 

 

 

 

 

Deferred income taxes

 

(8,677

)

3,091

 

Deferred rent

 

4,411

 

3,979

 

Depreciation and amortization of property and equipment

 

9,830

 

12,656

 

Amortization of intangibles

 

141

 

147

 

Amortization of discount on term loans and subordinated notes

 

409

 

1,606

 

Amortization of deferred financing fees

 

624

 

860

 

Amortization of prepaid rent

 

159

 

159

 

Non-cash stock compensation expense

 

28

 

4,824

 

Changes in operating assets and liabilities

 

 

 

 

 

Accounts receivable

 

(1,211

)

(2,647

)

Merchandise inventories

 

(3,005

)

(842

)

Insurance claims receivable

 

 

3,884

 

Prepaid expense and other

 

(3,266

)

994

 

Other assets

 

(2,132

)

507

 

Accounts payable

 

7,010

 

552

 

Accrued expenses and other

 

1,902

 

(2,925

)

Other long-term liabilities

 

203

 

109

 

Net cash used in operating activities

 

(5,282

)

(13,216

)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(31,363

)

(26,465

)

Net cash used in investing activities

 

(31,363

)

(26,465

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from long-term debt, net

 

256,225

 

 

Payments on long-term debt

 

(208,125

)

(1,375

)

Proceeds from common shares issued in initial public offering, net of issuance costs

 

 

158,821

 

Cash dividends paid on preferred stock

 

 

(76,818

)

Issuance costs from debt re-pricing

 

 

(3,868

)

Net cash provided by financing activities

 

48,100

 

76,760

 

Net increase in cash and cash equivalents

 

11,455

 

37,079

 

Cash and cash equivalents — beginning of period

 

30,172

 

21,723

 

Cash and cash equivalents — end of period

 

$

41,627

 

$

58,802

 

Cash paid during the period for

 

 

 

 

 

Interest

 

$

7,140

 

$

7,722

 

Income taxes

 

$

135

 

$

2

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

7



Table of Contents

 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

 

Consolidated Statements of Changes in Redeemable Preferred Stock and Stockholders’ (Deficit) Equity

(In thousands, except share amounts)

(Unaudited)

 

 

 

REDEEMABLE PREFERRED STOCK

 

STOCKHOLDERS’ (DEFICIT) EQUITY

 

 

 

Series A  
Preferred Stock

 

Series B  
Preferred Stock

 

 

 

Class A  
Common Stock

 

Class B  
Common Stock

 

Additional  
Paid-in  

 

Treasury

 

Accumulated

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Total

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Stock

 

Deficit

 

Total

 

Balance at March 31, 2013

 

43,058

 

$

84,328

 

64,016.98

 

$

149,916

 

$

234,244

 

12,506,885

 

$

 

 

$

 

$

 

$

(1,500

)

$

(233,944

)

$

(235,444

)

Non-cash stock compensation expense

 

 

 

 

 

 

 

 

 

 

4,824

 

 

 

4,824

 

Deemed dividends on preferred stock

 

 

440

 

 

863

 

1,303

 

 

 

 

 

 

 

(1,303

)

(1,303

)

Exchange of preferred stock for common stock upon consummation of IPO

 

(43,058

)

(68,572

)

(64,016.98

)

(101,975

)

(170,547

)

 

 

15,504,296

 

16

 

170,531

 

 

 

170,547

 

Incremental dividend (paid in cash)

 

 

2,945

 

 

8,873

 

11,818

 

 

 

 

 

 

 

(11,818

)

(11,818

)

Incremental dividend (at IPO share value)

 

 

 

 

 

 

 

 

 

 

31,009

 

 

(31,009

)

 

Preferred stock dividend

 

 

(19,141

)

 

(57,677

)

(76,818

)

 

 

 

 

 

 

 

 

New shares issued upon consummation of IPO

 

 

 

 

 

 

13,407,632

 

 

 

 

158,821

 

 

 

158,821

 

Conversion of Class B common stock to Class A common stock

 

 

 

 

 

 

33,576

 

 

(33,576

)

(1

)

1

 

 

 

 

Exercise of warrants to purchase shares of common stock

 

 

 

 

 

 

95,386

 

 

 

 

 

 

 

 

Exercise of warrants to purchase shares of common stock (3,627 from Treasury Shares)

 

 

 

 

 

 

 

 

 

 

(40

)

40

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(40,170

)

(40,170

)

Balance at September 29, 2013

 

 

$

 

 

$

 

$

 

26,043,479

 

$

 

15,470,720

 

$

15

 

$

365,146

 

$

(1,460

)

$

(318,244

)

$

45,457

 

 

8



Table of Contents

 

FAIRWAY GROUP HOLDINGS CORP. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

 

1.   D ESCRIPTION OF BUSINESS AND ORGANIZATION

 

Fairway Group Holdings Corp. was incorporated in the State of Delaware on September 29, 2006 and is controlled by investment funds managed by Sterling Investment Partners L.P. and affiliates (collectively, “Sterling”).

 

Fairway Group Holdings Corp. and subsidiaries (the “Company” or “Fairway”) operates in the retail food industry, selling fresh, natural and organic products, prepared foods and hard to find specialty and gourmet offerings along with a full assortment of conventional groceries.  The Company operates fourteen stores in the Greater New York metropolitan area, of which nine stores were open prior to the beginning of fiscal 2013, a store in Woodland Park, NJ (including an integrated Fairway Wine & Spirits location) which opened in late June 2012, a store in Westbury, NY which opened in August 2012, a store in the Kips Bay neighborhood of Manhattan, NY which opened in late December 2012, a store in the Chelsea neighborhood of Manhattan, NY which opened in late July 2013 and a store in Nanuet, NY which opened in mid-October 2013.  The Company has determined that it has one reportable segment.  Substantially all of the Company’s revenue comes from the sale of items at its retail food stores.

 

On April 12, 2013, the Company amended and restated its certificate of incorporation to increase the number of shares the Company is authorized to issue to 150,000,000 shares of Class A common stock, 31,000,000 shares of Class B common stock and 5,000,000 shares of preferred stock. The amendment and restatement of the certificate of incorporation implemented an internal recapitalization pursuant to which the Company effected a 118.58-for-one stock split on its outstanding common stock and reclassified its outstanding common stock into shares of Class A common stock. Accordingly, all common share and per share amounts in these financial statements and the notes thereto have been adjusted to reflect the 118.58-for-one stock split as though it had occurred at the beginning of the initial period presented.

 

On April 22, 2013, the Company completed its initial public offering (“IPO”) of 15,697,500 shares of its Class A common stock at a price of $13.00 per share, which included 13,407,632 new shares sold by Fairway and the sale of 2,289,868 shares by existing stockholders (including 2,047,500 sold pursuant to the underwriters exercise of their over-allotment option). The Company received approximately $158.8 million in net proceeds from the IPO after deducting the underwriting discount and expenses related to the IPO. The Company used the net proceeds that it received from the IPO to (i) pay accrued but unpaid dividends on its Series A preferred stock totaling approximately $19.1 million, (ii) pay accrued but unpaid dividends on its Series B preferred stock totaling approximately $57.7 million, (iii) pay $9.2 million to an affiliate of Sterling Investment Partners in connection with the termination of the Company’s management agreement with such affiliate and (iv) pay contractual initial public offering bonuses to certain members of the Company’s management totaling approximately $8.1 million. The Company intends to use the remainder of the net proceeds, approximately $64.7 million, for new store growth and other general corporate purposes.  The Company did not receive any of the proceeds from the sale of shares by the selling stockholders. In connection with the IPO, the Company issued 15,504,296 shares of Class B common stock (of which 33,576 shares automatically converted into 33,576 shares of Class A common stock) in exchange for all outstanding preferred stock and all accrued dividends not paid in cash with the proceeds of the IPO.

 

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information, and do not include all of the information and footnotes required for complete financial statements in accordance with US GAAP pursuant to such rules and regulations. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013.

 

The accompanying unaudited consolidated financial statements as of September 29, 2013, and for the thirteen and twenty-six weeks ended September 30, 2012 and September 29, 2013 reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and operating results of the Company. All material intercompany accounts and transactions have been eliminated in the unaudited consolidated financial statements. The results of operations for the thirteen and

 

9



Table of Contents

 

twenty-six weeks ended September 29, 2013 may not necessarily be indicative of the results that may be expected for the entire fiscal year ending March 30, 2014.

 

Certain reclassifications have been made to the prior year amounts to conform to the current year’s presentation.

 

There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended March 31, 2013 that have had a material impact on our unaudited interim consolidated financial statements and related notes.

 

3. NET LOSS PER COMMON SHARE

 

Basic and diluted net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted average common shares outstanding for the fiscal period.  Diluted net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted average common shares outstanding for the fiscal period plus the effect of any potential common shares that have been issued if these additional shares are dilutive.  For all periods presented, basic and diluted net loss per common share are the same, as any additional common stock equivalents would be anti-dilutive.

 

For the thirteen and twenty-six weeks ended September 30, 2012, there were 2,085,093 additional potentially dilutive shares of common stock, consisting of outstanding warrants to purchase 1,930,822 shares of Class A common stock and 154,271 shares of unvested restricted stock.  For the thirteen and twenty-six weeks ended September 29, 2013, there were 5,504,209 additional potentially dilutive shares of common stock, consisting of outstanding warrants to purchase 1,831,809 shares of Class A common stock, 119,383 shares of unvested restricted stock, 1,154,691 options to purchase shares of Class A common stock and unvested restricted stock units covering 2,398,326 shares of Class A common stock.

 

Prior to the consummation of the IPO and the exchange of the Company’s outstanding preferred stock for Class B common stock, common stockholders did not share in net income unless earnings exceeded the unpaid dividends on the preferred stock. Accordingly, in the thirteen and twenty-six weeks ended September 30, 2012 there were no earnings available for common stockholders because the Company reported a net loss for the period. If the Company had exchanged its outstanding preferred stock on the first day of the thirteen and twenty-six week period ended September 30, 2012, for shares of Class B common stock on the same basis as it exchanged such shares in the IPO, the Company would have issued 12,294,570 and 11,982,529 shares of Class B common stock for the thirteen and twenty-six weeks ended September 30, 2012, respectively, and it would have had 24,625,727 and 24,303,096 weighted average common shares outstanding during the thirteen and twenty-six weeks ended September 30, 2012, respectively, and the net loss per common share would have been $0.32 and $0.48  for the thirteen and twenty-six weeks ended September 30, 2012, respectively.  See note 5 below.

 

4. LONG-TERM DEBT

 

A summary of long-term debt is as follows (in thousands):

 

 

 

March 31,
2013

 

September 29,
 2013

 

Credit facility, gross

 

$

274,313

 

$

272,938

 

Less unamortized discount

 

(15,000

)

(16,765

)

Credit facility, net

 

259,313

 

256,173

 

Less current maturities

 

(2,750

)

(2,750

)

Long-term debt, net of current maturities

 

$

256,563

 

$

253,423

 

 

10



Table of Contents

 

A summary of interest expense is as follows (in thousands):

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

 

 

September 30, 
2012

 

September 29, 
2013

 

September 30, 
2012

 

September 29, 
2013

 

Interest on senior credit facility

 

$

4,900

 

$

3,725

 

$

8,880

 

$

7,893

 

Interest on subordinated promissory note payable to related party

 

219

 

 

439

 

 

Amortization of original issue discount

 

313

 

830

 

409

 

1,606

 

Amortization of deferred financing fees

 

329

 

437

 

624

 

860

 

Other interest expense, net

 

24

 

7

 

17

 

25

 

Total

 

$

5,785

 

$

4,999

 

$

10,369

 

$

10,384

 

 

2013 Senior Credit Facility

 

In February 2013, Fairway Group Holdings Corp. and its wholly-owned subsidiary, Fairway Group Acquisition Company, as the borrower, entered into a senior secured credit facility consisting of a $275 million term loan (the “2013 Term Facility”) and a $40 million revolving credit facility, which includes a $40 million letter of credit sub-facility (the “2013 Revolving Facility” and together with the 2013 Term Facility, the “2013 Senior Credit Facility”) with the 2013 Term Facility maturing in August 2018 and the 2013 Revolving Facility maturing in August 2017. The Company used the proceeds from the 2013 Term Facility to repay the $264.5 million of outstanding borrowings (including accrued interest) under its 2012 senior credit facility and pay fees and expenses.  On May 3, 2013, the 2013 Senior Credit Facility was amended to, among other things, lower the interest rate margins and eliminate the interest coverage ratio financial covenant.

 

Borrowings under the 2013 Senior Credit Facility, as amended, bear interest, at the option of the Company, at (i) adjusted LIBOR (subject to a 1.0% floor) plus 4.0% or (ii) an alternate base rate plus 3.0%. In addition, there is a fee payable quarterly in an amount equal to 1% per annum of the undrawn portion of the 2013 Revolving Facility, calculated based on a 360-day year. Interest is payable quarterly in the case of base rate loans and on the maturity dates or every three months, whichever is shorter, in the case of adjusted LIBOR loans. The 4.0% and 3.0% margins will each be reduced by 50 basis points at any time when the Company’s corporate family rating from Moody’s Investor Services Inc. is B2 or higher and the Company’s corporate rating from Standard & Poors Rating Service is B or higher, in each case with a stable outlook, and as long as certain events of default have not occurred.  Prior to the May 2013 amendment, borrowings under the 2013 Senior Credit Facility bore interest, at the option of the Company, at (i) adjusted LIBOR (subject to a 1.25% floor) plus 5.50% or (ii) an alternate base rate plus 4.50%.

 

All of the borrower’s obligations under the 2013 Senior Credit Facility, as amended, are unconditionally guaranteed (the “Guarantees”) by the Company (other than the borrower and any future unrestricted subsidiaries as the Company may designate, at its discretion, from time to time) (the “Guarantors”). Additionally, the 2013 Senior Credit Facility and the Guarantees are secured by a first-priority perfected security interest in substantially all present and future assets of the borrower and each Guarantor, including accounts receivable, property and equipment, merchandise inventories, general intangibles, leases, intellectual property, investment property and intercompany notes among Guarantors.

 

Mandatory prepayments under the 2013 Senior Credit Facility, as amended, are required with: (i) 50% of adjusted excess cash flow (which percentage shall be reduced to 25% upon achievement and maintenance of a leverage ratio of less than 5.0:1.0, and to 0% upon achievement and maintenance of a leverage ratio of less than 4.0:1.0); (ii) 100% of the net cash proceeds of asset sales or other dispositions of property by the Company and certain of its subsidiaries (subject to certain exceptions and reinvestment provisions); and (iii) 100% of the net cash proceeds of issuances, offerings or placements of debt obligations (subject to certain exceptions).

 

The 2013 Senior Credit Facility, as amended, contains negative covenants, including restrictions on: (i) the incurrence of additional debt; (ii) liens and sale-leaseback transactions; (iii) loans and investments; (iv) guarantees

 

11



Table of Contents

 

and hedging agreements; (v) the sale, transfer or disposition of assets and businesses; (vi) dividends on, and redemptions of, equity interests and other restricted payments, including dividends and distributions to the Company by its subsidiaries; (vii) transactions with affiliates; (viii) changes in the business conducted by the Company; (ix) payment or amendment of subordinated debt and organizational documents; and (x) maximum capital expenditures. The Company is also required to comply with a financial covenant for maximum total leverage ratio.

 

The Company was in compliance with all applicable affirmative, negative and financial covenants of the 2013 Senior Credit Facility at September 29, 2013.

 

The 2013 Senior Credit Facility resulted in the Company capitalizing new deferred financing fees of approximately $800,000, to be amortized over the life of the loan on the effective interest method. These costs included administrative fees, advisory fees, title fees, and legal and accounting fees.

 

The Company reviewed the terms of the 2013 Senior Credit Facility and ascertained that the conditions have been met, pursuant to the FASB’s guidance, to treat the transaction as a debt modification of the Company’s 2012 senior credit facility.  As a result, (i) the unamortized original issue discount of approximately $11.8 million relating to the 2012 senior credit facility and (ii) debt placement fees of approximately $3.6 million in connection with the 2013 Senior Credit Facility are collectively reflected as original issue discount, to be amortized over the life of the loan on the effective interest method.

 

The amendment of the 2013 Senior Credit Facility resulted in the Company capitalizing new deferred financing fees of approximately $500,000, to be amortized over the remaining life of the loan using the effective interest method.  Additionally, as a result of the accounting treatment applied to this amendment, (i) the unamortized original issue discount of approximately $14.7 million relating to the 2013 Senior Credit Facility and (ii) debt placement fees of approximately $3.4 million in connection with the amendment, are collectively reflected as original issue discount, to be amortized over the life of the loan using the effective interest method.

 

At September 29, 2013, the Company had $18.4 million of availability under the 2013 Revolving Facility, all of which was available for letters of credit.  At September 29, 2013, the Company had $21.6 million of letters of credit outstanding.

 

For the portion of the thirteen and twenty-six week periods ended September 30, 2012 ending August 17, 2012, the Company had in effect its 2011 senior credit facility, which consisted of a $200 million term loan and a $35 million revolving credit facility.  Borrowings under the 2011 senior credit facility bore interest, at the option of the Company, at (i) adjusted LIBOR (subject to a 1.5% floor) plus 6% or (ii) an alternate base rate plus 5%.

 

For the portion of the thirteen and twenty-six week periods ended September 30, 2012 subsequent to August 17, 2012, the Company had in effect its 2012 senior credit facility, which consisted of a $260 million term loan and a $40 million revolving credit facility.  Borrowings under the 2012 senior credit facility bore interest, at the option of the Company, at (i) adjusted LIBOR (subject to a 1.5% floor) plus 6.75% or (ii) an alternate base rate plus 5.75%.

 

5. REDEEMABLE PREFERRED STOCK, COMMON STOCK AND WARRANTS

 

On April 12, 2013, the Company amended and restated its certificate of incorporation to increase the number of shares the Company is authorized to issue to 150,000,000 shares of Class A common stock, 31,000,000 shares of Class B common stock and 5,000,000 shares of preferred stock. The amendment and restatement of the certificate of incorporation implemented an internal recapitalization pursuant to which the Company effected a 118.58-for-one stock split on its outstanding common stock and reclassified its outstanding common stock into shares of Class A common stock. The Class A common stock and Class B common stock have identical rights, except voting and conversion rights. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to ten votes and is convertible at any time into one share of Class A common stock.

 

On April 22, 2013, the Company completed its IPO of 15,697,500 shares of its Class A common stock at a price of $13.00 per share, which included 13,407,632 new shares sold by Fairway and the sale of 2,289,868 shares by existing stockholders (including 2,047,500 sold pursuant to the underwriters exercise of their over-allotment option). In connection with the IPO, the Company issued 15,504,296 shares of Class B common stock (of which

 

12



Table of Contents

 

33,576 shares automatically converted into 33,576 shares of Class A common stock) in exchange for all outstanding preferred stock and all accrued dividends not paid in cash with the proceeds of the IPO.

 

A summary of the Company’s capitalization upon closing of the IPO is as follows:

 

Common stock issued at March 31, 2013

 

12,506,885

 

Treasury stock

 

(136,485

)

Exchange of preferred stock for shares of common stock in connection with the IPO

 

15,504,296

 

Sale of common stock by the Company through IPO

 

13,407,632

 

Exercise of warrants

 

95,386

 

Common stock issued and outstanding after IPO

 

41,377,714

 

 

The Company used a portion of the net proceeds from its IPO to repay $19.1 million of accrued but unpaid dividends on its Series A preferred stock and $57.7 million of accrued but unpaid dividends on its Series B preferred stock.  Because the Company and the preferred stockholders had entered into an agreement to exchange the preferred stock for a fixed number of shares of Class B common stock based on (i) an assumed IPO price of $11.00 per share, (ii) an assumption that $65.0 million of accrued dividends would be paid in cash with the proceeds of the IPO and (iii) the fact that the number of shares of Class B common stock to be issued in the exchange would not change if the Company decreased or increased the amount of accrued dividends that it paid in cash with the net proceeds of the offering, and because the IPO price was greater than $11.00 per share and the amount of dividends paid in cash with the proceeds of the offering increased, the Company recognized an incremental dividend of approximately $42.8 million, consisting of $11.8 million, representing the additional cash proceeds used to pay dividends, and $31.0 million, representing an amount equal to the number of shares of Class B common stock the Company issued multiplied by $2.00, the difference between the $13.00 IPO price and the $11.00 price the Company used to calculate the number of shares of Class B common stock to be issued by the Company in exchange for the preferred stock and accrued but unpaid dividends.

 

As of September 29, 2013 there were 1,831,809 warrants outstanding.

 

Warrants at March 31, 2013

 

1,930,822

 

Exercised during the 13 weeks ended June 30, 2013

 

95,386

 

Exercised during the 13 weeks ended September 29, 2013

 

3,627

 

Warrants at September 29, 2013

 

1,831,809

 

 

6.  SHARE-BASED COMPENSATION

 

We account for share-based compensation awards in accordance with the provisions of FASB Accounting Standards Codification (“ASC”) Topic 718 — Compensation — Stock Compensation (“ASC 718”), which requires companies to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the awards ultimately expected to vest is recognized as expense over the requisite service period. The Company recognized total stock-based compensation of $2,000 and $2.8 million for the thirteen weeks ended September 30, 2012 and September 29, 2013, respectively, and $28,000 and $4.8 million for the twenty-six weeks ended September 30, 2012 and September 29, 2013, respectively, as general and administrative expenses in the Company’s Consolidated Statements of Operations.

 

The Company’s 2007 Equity Compensation Plan (the “2007 Plan”), which provided for the grant of stock options and restricted shares, and the 2013 Long-Term Incentive Plan (the “2013 Plan”), which provides for the grant of stock options, restricted stock units, restricted stock, other stock-based awards and other cash-based awards,

 

13



Table of Contents

 

are more fully described in Part III, Item 11 in the Company’s Annual Report on Form 10-K for the year ended March 31, 2013 under the caption “Equity Compensation Plans.”  Changes in equity awards outstanding under the 2007 Plan and 2013 Plan during the twenty-six weeks ended September 29, 2013 are summarized as follows:

 

2007 Equity Compensation Plan

 

As of September 29, 2013, there was $508,000 of unrecognized compensation expense related to the restricted stock compensation awards granted under the 2007 Plan.

 

The status of the Company’s unvested restricted stock grants for the twenty-six weeks ended September 29, 2013 is summarized as follows:

 

 

 

Restricted 
Stock

 

Weighted
Average Grant
Date Fair Value

 

Balance at March 31, 2013

 

145,971

 

$

4.43

 

Vested

 

(26,588

)

6.38

 

Outstanding unvested awards at September 29, 2013

 

119,383

 

4.00

 

 

2013 Long-Term Incentive Plan

 

Restricted Stock Units

 

As of September 29, 2013, there was $27.1 million of unrecognized compensation expense related to the restricted stock unit compensation awards granted under the 2013 Plan.

 

The status of the Company’s unvested restricted stock units for the twenty-six weeks ended September 29, 2013 is summarized as follows:

 

 

 

Restricted 
Stock Units

 

Weighted
Average Grant
Date Fair Value

 

Balance at March 31, 2013

 

 

$

 

Granted

 

2,434,562

 

13.52

 

Forfeited

 

(36,236

)

13.00

 

Outstanding unvested awards at September 29, 2013

 

2,398,326

 

13.53

 

 

Stock Options

 

As of September 29, 2013, there was $4.5 million of unrecognized compensation expense related to the stock option compensation awards granted under the 2013 Plan.

 

A summary of stock option activity for the twenty-six weeks ended September 29, 2013 is as follows:

 

14



Table of Contents

 

 

 

Stock 
Options

 

Weighted
Average
exercise
price

 

Weighted
average
remaining 
contractual life 
(years)

 

Balance at March 31, 2013

 

 

$

 

 

Granted

 

1,160,771

 

14.35

 

10.0

 

Forfeited

 

(6,080

)

13.00

 

9.9

 

Outstanding unvested awards at September 29, 2013

 

1,154,691

 

14.35

 

9.6

 

 

The aggregate intrinsic value of stock options outstanding as of September 29, 2013 was $12.4 million.  Aggregate intrinsic value represents the value of the Company’s closing stock price on the last trading day of the fiscal period in excess of the weighted average exercise price multiplied by the number of options outstanding or exercisable.  No options were exercised during the twenty-six weeks ended September 29, 2013 or exercisable as of September 29, 2013.

 

7. RELATED PARTY TRANSACTIONS

 

Operating Leases

 

The Company leases stores, a production bakery, and warehouses from entities which are 1/3 owned by an individual who is a director and executive officer of the Company. These leases expire on January 31, 2032.

 

The Company leases its Red Hook store from an entity which is 16.67% owned by an individual who is a director and executive officer of the Company.  This lease expires on October 31, 2016.

 

Utility Services

 

The Company obtains utility services from an entity which is 16.67% owned by an individual who is a Company director and executive officer.

 

Management Agreement

 

Prior to the Company’s IPO, pursuant to a management agreement, the Company paid Sterling Investment Partners Advisers, LLC, an affiliate of the Company’s controlling stockholders, an annual management advisory fee and fees in connection with certain debt and equity financings (other than the IPO).  The management agreement was terminated as part of the IPO in exchange for a payment of $9.2 million.

 

8. INCOME TAXES

 

The Company’s effective tax rate for the thirteen weeks ended September 30, 2012 and September 29, 2013 was 42.9% and (7.0)%, respectively.  The Company’s effective tax rate for the twenty-six weeks ended September 30, 2012 and September 29, 2013 was 42.3% and (8.7)%, respectively.  The annual effective tax rate does not consider the effect of the IPO which occurred on April 22, 2013 and had no material effect on the Company’s effective tax rate.

 

The Company continues to provide a partial valuation allowance against its deferred tax assets. As a result, the Company did not record any income tax benefit related to the operating losses for the thirteen and twenty-six weeks ended September 29, 2013 but did recognize income tax expense related to indefinite-lived intangible assets.

 

15



Table of Contents

 

9. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company occupies premises pursuant to lease agreements which expire through 2039.  Rent under lease agreements with related parties, except for certain lease years when the rent is determined by arbitration, increases annually by either 50% of the percentage increase in the consumer price index or by the percentage increase in the consumer price index of up to 5%.  Lease agreements with non-related parties include various escalation clauses.

 

The aggregate minimum rental commitments under all operating leases, for which we have possession, as of September 29, 2013 are as follows for the fiscal years ending (in thousands):

 

March 30, 2014

 

$

14,689

 

March 29, 2015

 

31,385

 

April 3, 2016

 

32,166

 

April 2, 2017

 

31,625

 

April 1, 2018

 

30,164

 

Thereafter

 

504,660

 

 

 

$

644,689

 

 

Other Contingencies

 

The Company, from time to time, is and may be subject to legal proceedings and claims which arise in the ordinary course of its business.  The Company has not accrued any amounts in connection with these uncertainties as the Company has determined that losses from these uncertainties are not probable.  For all matters, including unasserted claims, where a loss is reasonably possible, the aggregate range of estimated losses is not material to the financial position, results of operations, liquidity or cash flows of the Company.

 

16



Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013, as filed with the Securities and Exchange Commission. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q.  See “Special Note on Forward Looking Statements” above. The results of operations for the thirteen and twenty-six  weeks ended September 29, 2013 may not necessarily be indicative of the results that may be expected for the entire fiscal year ending March 30, 2014.

 

Our fiscal year is the 52- or 53-week period ending on the Sunday closest to March 31. For ease of reference, we identify our fiscal years by reference to the calendar year in which the fiscal year ends. Accordingly, “fiscal 2013” refers to our fiscal year ended on March 31, 2013 and “fiscal 2014” refers to our fiscal year ending March 30, 2014.  In this section, we refer to the thirteen weeks ended September 30, 2012 as the “second quarter 2013” and we refer to the thirteen weeks ended September 29, 2013 as the “second quarter 2014” and we refer to the twenty-six weeks ended September 30, 2012 as “first half 2013” and we refer to the twenty-six weeks ended September 29, 2013 as “first half 2014”

 

Overview

 

Fairway Market is a high-growth food retailer offering customers a differentiated one-stop shopping experience “Like No Other Market”. Since beginning as a small neighborhood market in the 1930s, Fairway has established itself as a leading food retailing destination in the Greater New York City metropolitan area, an approximately $30 billion food retail market that is the largest in the United States. Our stores emphasize an extensive selection of fresh, natural and organic products, prepared foods and hard-to-find specialty and gourmet offerings, along with a full assortment of conventional groceries. Our prices typically are lower than natural / specialty stores and competitive with conventional supermarkets. We believe that the combination of our broad product selection, in-store experience and value pricing creates a premier food shopping experience that appeals to a broad demographic.

 

We operate 14 locations in New York, New Jersey and Connecticut, three of which include Fairway Wines & Spirits stores, including our store located in the Chelsea neighborhood of Manhattan that we opened on July 24, 2013 and the store in Nanuet, NY which opened on October 10, 2013. Seven of our food stores, which we refer to as “urban stores,” are located in New York City, and the remainder, which we refer to as “suburban stores,” are located in New York (outside of New York City), New Jersey and Connecticut .   We expect to open a new store in Lake Grove in Suffolk County, Long Island, NY in Spring 2014, a new store in the TriBeCa neighborhood of Manhattan in the Fall of calendar 2014 and a new store in the Hudson Yards neighborhood in west midtown Manhattan in Spring 2015.

 

We believe our stores are among the most productive in the industry in net sales per store and net sales per square foot as a result of our distinctive merchandising strategies, value positioning and efficient operating structure. Through our focused efforts on expanding our store base, enhancing our customers’ shopping experience and improving the value proposition we offer our customers, we have increased our net sales from $160.5 million in second quarter 2013 to $183.2 million in second quarter 2014, or 14.1% and from $315.2 million in first half 2013 to $370.0 million in first half 2014, or 17.4%, and our Adjusted EBITDA from $10.1 million in second quarter 2013 to $10.6 million in second quarter 2014, or 4.7%, and from $21.5 million in first half 2013 to $23.3 million in first half 2014, or 8.4%. We had net losses of $7.8 million and $12.2 million in second quarter 2013 and second quarter 2014, respectively, and $11.7 million and $40.2 million in first half 2013 and first half 2014, respectively. For a discussion of Adjusted EBITDA and a reconciliation to Adjusted EBITDA from net loss, see “—How We Assess the Performance of Our Business—Adjusted EBITDA” below. While our net sales and Adjusted EBITDA have grown significantly, our comparable store sales have been impacted by sales transfer from our existing stores to our newly opened stores that are in closer proximity to some of our customers and by our price optimization initiative that we launched across our store network late in fiscal 2011. Our price optimization initiative has resulted in an increase in our gross margins.

 

17



Table of Contents

 

Since Sterling acquired Fairway in January 2007, we have made significant additions to our company’s personnel, including experienced industry executives and the next generation management and merchandising teams to support our long-term growth objectives. We have upgraded our systems and enhanced our new store development and training processes. We have also developed a robust, proprietary daily reporting portal that enables us to effectively manage our growing number of new stores and have implemented initiatives to reduce shrink and improve labor productivity throughout our operations. We believe we can leverage these investments to improve our operating margins as we grow our store base. Since March 2009, we have opened ten food stores, three of which include Fairway Wines & Spirits locations. See “—How We Assess the Performance of Our Business—Central Services” below.

 

Outlook

 

We intend to continue our strong growth by expanding our store base in our existing and new markets, capitalizing on consumer trends and improving our operating margins. We opened an additional food store and integrated Fairway Wines & Spirits location in Woodland Park, New Jersey in late June 2012, an additional food store in Westbury, New York in August 2012, an additional food store in Manhattan’s Kips Bay neighborhood in late December 2012, an additional food store in Manhattan’s Chelsea neighborhood in late July 2013 and an additional food store in Nanuet, New York in mid-October 2013. We reopened our Red Hook store, which was temporarily closed due to damage sustained during Hurricane Sandy, on March 1, 2013.  We expect to open a new store in Lake Grove in Suffolk County, Long Island, NY in Spring 2014, a new store in the TriBeCa neighborhood of Manhattan in the Fall 2014 and a new store in the Hudson Yards neighborhood in west midtown Manhattan in Spring 2015.

 

For the next several years beginning in fiscal 2015, we intend to grow our store base in the Greater New York City metropolitan area at a rate of three to four stores annually. Over time, we also plan to expand Fairway’s presence into new, high-density metropolitan markets. Based on demographic research conducted for us by the Buxton Company, a customer analytics research firm, we believe, based on these demographics, we have the opportunity to more than triple the number of stores in our existing marketing region of the Greater New York City metropolitan area, the Northeast market (from New England to the District of Columbia) can support up to 90 stores and the U.S. market can support more than 300 additional stores (including stores in the Northeast) operating under our current format.

 

We believe that we are well positioned to capitalize on evolving consumer preferences and other key trends currently shaping the food retail industry. These trends include an increasing consumer focus on the shopping experience and on healthy eating choices and fresh, quality offerings, including locally sourced products, as well as growing interest in high-quality, value-oriented private label product offerings.

 

We intend to improve our operating margins through scale efficiencies, improved systems, continued cost discipline and enhancements to our merchandise offerings. We expect store growth will also permit us to benefit from economies of scale in sourcing products and will enable us to leverage our existing infrastructure.

 

Factors Affecting Our Operating Results

 

Various factors affect our operating results during each period, including:

 

Store Openings

 

We expect the new stores we open to be the primary driver of our sales, operating profit and market share gains. Our results of operations have been and will continue to be materially affected by the timing and number of new store openings and the amount of new store opening costs. For example, we typically incur higher than normal employee costs at the time of a new store opening associated with set-up and other opening costs. Operating margins are also affected by promotional discounts and other marketing costs and strategies associated with new store openings, as well as higher shrink, primarily due to overstocking, and costs related to hiring and training new employees. Additionally, promotional activities may result in higher than normal net sales in the first several weeks following a new store opening. A new store builds its sales volume and its customer base over time and, as a result, generally has lower margins and higher operating expenses, as a percentage of sales, than our more mature stores. A new store can take more than a year to achieve a level of operating performance comparable to our similarly existing stores. Stores that we have opened in higher density urban markets typically have generated higher sales volumes and margins than stores in suburban areas.

 

18



Table of Contents

 

We believe our differentiated format and destination one-stop shopping appeal attracts customers from as far as 25 miles away. As we open new stores in closer proximity to our customers who currently travel longer distances to shop at our stores, we expect some of these customers to take advantage of the convenience of our new locations. As a result, we have experienced in the past, and expect to experience in the future, some sales volume transfer from our existing stores to our new stores as some of our existing customers switch to these new, closer locations. Consequently, while we expect our new stores will impact sales at our existing stores in close proximity, we believe that by making shopping at our stores for those customers who travel longer distances more convenient, our overall sales to these customers will increase as they increase the frequency and amount of purchases from our stores.

 

Infrastructure Investment

 

Our historical operating results reflect the impact of our ongoing investments in infrastructure to support our growth. Since Sterling acquired Fairway in January 2007, we have made significant investments in management, information technology systems, infrastructure, compliance and marketing. These investments include significant additions to our company’s personnel, including experienced industry executives and the next generation management and merchandising teams to support our long-term growth objectives.

 

Pricing Strategy

 

Our strategy is to price our broad selection of fresh, natural and organic foods, hard-to-find specialty and gourmet items and prepared foods at prices typically lower than those of natural / specialty stores. We price our full assortment of conventional groceries at prices competitive with those of conventional supermarkets. Beginning late in fiscal 2011, we launched a comprehensive price optimization initiative across our store network to refine the pricing and balance of our promotional activities across our mix of higher-margin perishable items and everyday value-oriented traditional grocery items. Our price optimization initiative involves determining prices that will improve our operating margins based upon our analysis of how demand varies at different price levels, as well as our costs and inventory levels. This initiative has resulted in an increase in our gross margins.

 

Changes in Interest Expense

 

Our interest expense in any particular period is impacted by our overall level of indebtedness during that period and changes in the interest rates payable on such indebtedness. In February 2013, we refinanced our $300 million credit facility with a new senior credit facility, consisting of $275 million of term debt and a revolving credit facility of $40 million, principally to lower the interest rate we were paying under our August 2012 senior credit facility. In May 2013, we amended our senior credit facility to lower the interest rate we pay, which we expect will reduce our annualized cash interest payments by approximately $4.8 million. We expect that the fees and expenses incurred in connection with the amendment will be paid back through reduced interest payments by the end of fiscal 2014. In March 2013, we repaid our outstanding $7.3 million subordinated promissory note to a related party.

 

Effect of Hurricane Sandy

 

Hurricane Sandy struck the Greater New York City Metropolitan area on October 29, 2012.  While all but one of our stores were able to reopen within a day or two following the storm, we experienced business disruptions for a variety of storm-related reasons including power outages and transportation issues.  Our Red Hook, Brooklyn, NY store sustained substantial damage from the hurricane and was closed until it reopened on March 1, 2013.

 

We have submitted claims to our insurers of approximately $20 million and have received payments under our policies of $14.3 million.  We had an insurance receivable of $1.3 million related to this claim as of September 29, 2013.  We are working closely with our insurers and expect to receive additional payments over the balance of this year.  Furthermore, following Hurricane Sandy we have seen systematic increases in the market rate for insurance and we expect our insurance premiums will increase.

 

How We Assess the Performance of Our Business

 

In assessing performance, we consider a variety of performance and financial measures, principally growth in net sales, gross profit and Adjusted EBITDA and Central Services as a percentage of net sales. The key measures that we use to evaluate the performance of our business are set forth below:

 

19



Table of Contents

 

Net Sales

 

We evaluate sales because it helps us measure the impact of economic trends and inflation or deflation, the effectiveness of our merchandising, marketing and promotional activities, the impact of new store openings and the effect of competition over a given period. Our net sales comprise gross sales net of coupons and discounts. We do not record sales taxes as a component of retail revenues as we consider ourselves a pass-through conduit for collecting and remitting sales taxes.

 

We do not consider same store sales, which controls for the effects of new store openings, to be as meaningful a measure for us as it may be for other retailers because as a destination food retailer in a concentrated market area we have in the past experienced, and in the future expect to experience, sales transfer from our existing stores to our newly opened stores that are in closer proximity to some of our customers. Our practice is to include sales from a store (including its related wine and spirits locations), in same-store sales beginning on the first day of the fifteenth full month following the store’s opening. This practice may differ from the methods that our competitors use to calculate same-store or “comparable” sales. As a result, data in this report regarding our same-store sales may not be comparable to similar data made available by our competitors.

 

Various factors may affect our same-store sales, including:

 

·                                           our opening of new stores in the vicinity of our existing stores;

 

·                                           our price optimization initiative;

 

·                                           our competition, including competitor store openings or closings near our stores;

 

·                                           the number and dollar amount of customer transactions in our stores;

 

·                                           overall economic trends and conditions in our markets;

 

·                                           consumer preferences, buying trends and spending levels;

 

·                                           the pricing of our products, including the effects of inflation or deflation and promotions;

 

·                                           our ability to provide product offerings that generate new and repeat visits to our stores;

 

·                                           the level of customer service that we provide in our stores;

 

·                                           our in-store merchandising-related activities; and

 

·                                           our ability to source products efficiently.

 

As we continue to pursue our growth strategy, we expect that a significant percentage of our increase in net sales will continue to come from new stores not included in comparable store sales.

 

The food retail industry and our sales are affected by general economic conditions and seasonality, as well as the other factors discussed below, that affect store sales performance. Consumer purchases of high-quality perishables and specialty food products are particularly sensitive to a number of factors that influence the levels of consumer spending, including economic conditions, the level of disposable consumer income, consumer debt, interest rates and consumer confidence. In addition, our business is seasonal and, as a result, our average weekly sales fluctuate during the year and are usually highest in our third fiscal quarter, from October through December, when customers make holiday purchases, and typically lower during the summer months in our second fiscal quarter.

 

Gross Profit

 

We use gross profit to measure the effectiveness of our pricing and procurement strategies as well as initiatives to increase sales of higher margin items and to reduce shrink. We calculate gross profit as net sales less

 

20



Table of Contents

 

cost of sales and occupancy costs. Gross margin measures gross profit as a percentage of our net sales. Cost of sales includes the cost of merchandise inventory sold during the year (net of discounts and allowances), distribution costs, food preparation costs (primarily labor) and shipping and handling costs. Occupancy costs include store rental costs and property taxes. The components of our cost of sales and occupancy costs may not be identical to those of our competitors. As a result, data in this report regarding our gross profit and gross margin may not be comparable to similar data made available by our competitors.

 

Changes in the mix of products sold may impact our gross margin. Unlike natural / specialty stores, we also carry a full assortment of conventional groceries, which generally have lower margins than fresh, natural and organic foods, prepared foods and specialty and gourmet items. We expect to enhance our gross margins through:

 

·                                           economies of scale resulting from expanding the store base;

 

·                                           our price optimization initiative;

 

·                                           productivity gains through process and program improvements;

 

·                                           reduced shrinkage as a percentage of net sales; and

 

·                                           leveraging our purchasing power and that of our suppliers to obtain volume discounts from vendors.

 

Stores that we operate in higher density urban markets typically have generated higher sales volumes and margins than stores that we operate in suburban areas. As the percentage of our sales volumes provided by our suburban stores increases, our overall gross margins may decline.

 

Direct Store Expenses

 

Direct store expenses consist of store-level expenses such as salaries and benefits for our store work force, supplies, store depreciation and store-specific advertising and marketing costs. Store-level labor costs are generally the largest component of our direct store expenses. Direct store expenses at our new stores are typically higher than at our more established stores during the first few quarters of operations. The components of our direct store expenses may not be identical to those of our competitors. As a result, data in this report regarding our direct store expenses may not be comparable to similar data made available by our competitors.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of personnel costs that are not store specific, advertising and marketing expenses (including pre-opening advertising and marketing costs), depreciation and amortization expense as well as other expenses associated with our corporate headquarters, management expenses and expenses for accounting, information systems, legal, business development, human resources, purchasing and other administrative departments. Since Sterling acquired Fairway in January 2007, we have made significant investments in management, information technology systems, infrastructure, compliance and marketing to support our growth strategy. Our general and administrative expenses for the thirteen and twenty-six weeks ended September 30, 2012 and the twenty-six weeks ended September 29, 2013 include management fees paid to Sterling, which fees ceased upon consummation of our IPO in April 2013.

 

The components of our general and administrative expenses may not be identical to those of our competitors. As a result, data regarding our general and administrative expenses may not be comparable to similar data made available by our competitors. We expect that our general and administrative expenses will increase in future periods due to additional legal, accounting, insurance and other expenses we expect to incur as a result of being a public company.

 

Store Opening Costs

 

Store opening costs include rent expense incurred during construction of new stores and costs related to new location openings, including costs associated with hiring and training personnel, supplies, the costs associated with our dedicated store opening team and other miscellaneous costs. Rent expense is recognized upon receiving possession of a store site, which generally ranges from three to six months before the opening of a store, although in some situations the possession period can exceed twelve months. Store opening costs vary among locations due to several key factors, including the length of time between possession date and the date on which the location opens for business along with the time designated as the training period for new staff for the store. Accordingly, we expect

 

21



Table of Contents

 

store opening costs to vary from period to period depending on the number of new stores opened in the period, whether such stores opened early or late in the period and whether new stores will open early in the following period. Store opening costs are expensed as incurred.

 

Income from Operations

 

Income from operations consists of gross profit minus direct store expenses, general and administrative expenses, store opening costs and production center start-up costs. Income from operations will vary from period to period based on a number of factors, including the number of stores open and the number of stores in the process of being opened in each period.

 

Adjusted EBITDA

 

We believe that Adjusted EBITDA is a useful performance measure and we use it to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone can provide. We also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for employees, including our senior executives. In addition, the financial covenants in our senior credit facility are based on Adjusted EBITDA, subject to dollar limitations on certain adjustments. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

We define Adjusted EBITDA as earnings before interest expense, income taxes, depreciation and amortization expense, amortization of deferred financing costs, store opening costs (including pre-opening advertising costs), production center start-up costs, non-recurring expenses, equity compensation charges and management fees. Omitting interest, taxes and the other items provides a financial measure that facilitates comparisons of our results of operations with those of companies having different capital structures. Since the levels of indebtedness and tax structures that other companies have are different from ours, we omit these amounts to facilitate investors’ ability to make these comparisons. Similarly, we omit depreciation and amortization because other companies may employ a greater or lesser amount of owned property, and because in our experience, whether a store is new or one that is fully or mostly depreciated does not necessarily correlate to the contribution that such store makes to operating performance. We ceased paying management fees upon consummation of our IPO. We also believe that investors, analysts and other interested parties view our ability to generate Adjusted EBITDA as an important measure of our operating performance and that of other companies in our industry. Adjusted EBITDA should not be considered as an alternative to net income for the periods indicated as a measure of our performance.

 

The use of Adjusted EBITDA has limitations as an analytical tool and you should not consider this performance measure in isolation from, or as an alternative to, US GAAP measures such as net income (loss). Adjusted EBITDA is not a measure of liquidity under US GAAP or otherwise, and is not an alternative to cash flow from continuing operating activities. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring items. The limitations of Adjusted EBITDA include: (i) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; (iii) it does not reflect income tax payments we may be required to make; (iv) it does not reflect the cash requirements necessary to service interest or principal payments associated with indebtedness; and (v) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

 

To properly and prudently evaluate our business, we encourage you to review our consolidated financial statements included elsewhere in this report and the reconciliation to Adjusted EBITDA from net loss, the most directly comparable financial measure presented in accordance with US GAAP, set forth in the table below. All of the items included in the reconciliation from net loss to Adjusted EBITDA are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items that management does not consider in assessing our on-going operating

 

22



Table of Contents

 

performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect on-going operating performance.

 

 

 

Thirteen Weeks
Ended

 

Twenty-Six Weeks
Ended

 

(Dollars in thousands)

 

September 30,
2012

 

September 29,
2013

 

September 30,
2012

 

September 29,
2013

 

Net loss

 

$

(7,827

)

$

(12,224

)

$

(11,708

)

$

(40,170

)

 

 

 

 

 

 

 

 

 

 

Management agreement termination (a)

 

 

 

 

9,200

 

Contractual IPO bonuses

 

 

 

 

8,105

 

Other IPO-related expenses

 

 

 

 

795

 

Sub-total IPO transaction expenses

 

 

 

 

18,100

 

Transaction expenses (b)

 

2,778

 

 

2,778

 

 

Transaction bonuses (c)

 

980

 

 

980

 

 

Non-recurring items (d)

 

1,317

 

1,396

 

2,900

 

2,340

 

Management fees (e)

 

690

 

 

1,442

 

877

 

Interest expense, net (f)

 

5,785

 

4,999

 

10,369

 

10,384

 

Income tax (benefit) provision

 

(5,886

)

804

 

(8,581

)

3,207

 

Store depreciation and amortization

 

4,519

 

5,517

 

8,013

 

10,795

 

Corporate depreciation and amortization

 

1,116

 

1,054

 

2,117

 

2,167

 

Equity compensation charge

 

2

 

2,769

 

28

 

4,824

 

Store opening costs

 

5,530

 

3,911

 

11,304

 

6,897

 

Production center start-up costs

 

 

1,343

 

 

1,841

 

Pre-opening advertising costs

 

1,123

 

1,029

 

1,827

 

2,018

 

Adjusted EBITDA

 

$

10,127

 

$

10,598

 

$

21,469

 

$

23,280

 

 


(a)                                  Represents the fee paid, in connection with the IPO, to Sterling to terminate the management agreement.

 

(b)                                  Represents fees and expenses in connection with the refinancing of our 2011 senior credit facility.

 

(c)                                   Represents bonuses paid to certain members of our management in connection with the refinancing of our 2011 senior credit facility.

 

(d)                                  In the quarter and first half ended September 30, 2012, consists principally of pre-IPO related expenses, debt modification expenses and outside consultants.  In the quarter and first half ended September 29, 2013 represents legal fees, consultants and severance expenses.

 

(e)                                   Represents management fees paid to an affiliate of Sterling, including in the twenty-six weeks ended September 29, 2013 $0.7 million of prepaid fees expensed at the IPO date.

 

(f)                                    Includes amortization of deferred financing costs and original issue discount. See note 4 to our financial statements in Item 1 above.

 

Central Services

 

We have made significant investments in management, information technology systems, infrastructure, compliance and marketing.  These investments include significant additions to our company’s personnel, including experienced industry executives and the next generation management and merchandising teams to support our long-term growth objectives.  We believe that Central Services as a percentage of net sales is a useful performance measure and we use it to facilitate an evaluation of our infrastructure investment without distortions that may result from general and administrative expenses that do not directly relate to the operation of our business.  We define Central Services as general and administrative expenses less: depreciation and amortization related to general and administrative activities, management fees, transaction expenses, equity compensation and non-recurring items.  To properly and prudently evaluate our business, we encourage you to review our consolidated financial statements included elsewhere in this report and the reconciliation to Central Services from general and administrative expenses, the most directly comparable financial measure presented in accordance with US GAAP.

 

23



Table of Contents

 

Results of Operations

 

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of net sales and have been derived from our consolidated financial statements.

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

(Dollars in thousands)

 

September 30, 2012

 

September 29, 2013

 

September 30, 2012

 

September 29, 2013

 

Net sales

 

$

160,510

 

100.0

%

$

183,215

 

100.0

%

$

315,193

 

100.0

%

$

369,993

 

100.0

%

Cost of sales and occupancy costs (exclusive of depreciation and amortization)

 

108,631

 

67.7

 

123,845

 

67.6

 

212,627

 

67.5

 

249,223

 

67.4

 

Gross profit

 

51,879

 

32.3

 

59,370

 

32.4

 

102,566

 

32.5

 

120,770

 

32.6

 

Direct store expenses

 

38,504

 

24.0

 

45,470

 

24.8

 

72,988

 

23.2

 

89,602

 

24.2

 

General and administrative expenses

 

15,773

 

9.8

 

15,067

 

8.2

 

28,194

 

8.9

 

49,009

 

13.2

 

Store opening costs

 

5,530

 

3.4

 

3,911

 

2.1

 

11,304

 

3.6

 

6,897

 

1.9

 

Production center start-up costs

 

 

 

1,343

 

0.7

 

 

 

1,841

 

0.5

 

Loss from operations

 

(7,928

)

(4.9

)

(6,421

)

(3.5

)

(9,920

)

(3.1

)

(26,579

)

(7.2

)

Interest expense, net

 

(5,785

)

(3.6

)

(4,999

)

(2.7

)

(10,369

)

(3.3

)

(10,384

)

(2.8

)

Loss before income taxes

 

(13,713

)

(8.5

)

(11,420

)

(6.2

)

(20,289

)

(6.4

)

(36,963

)

(10.0

)

Income tax benefit (provision)

 

5,886

 

3.7

 

(804

)

(0.4

)

8,581

 

2.7

 

(3,207

)

(0.9

)

Net loss

 

$

(7,827

)

(4.9

)%

$

(12,224

)

(6.7

)%

$

(11,708

)

(3.7

)%

$

(40,170

)

(10.9

)%

 

Second Quarter Ended September 29, 2013 Compared With Second Quarter Ended September 30, 2012

 

Net Sales

 

We had net sales of $183.2 million in second quarter 2014, an increase of $22.7 million, or 14.1%, from $160.5 million in second quarter 2013.  Approximately 94% of the increase, or $21.3 million, was attributable to the net sales from the three new stores we opened subsequent to July 1, 2012, including the store in Westbury, Long Island in August 2012, the store in the Kips Bay neighborhood of Manhattan in December 2012 and the store in the Chelsea neighborhood of Manhattan in July 2013.

 

Comparable store sales increased 1.0% in second quarter 2014 compared to second quarter 2013.  Customer transactions in our comparable stores decreased by 0.6% and the average transaction size at our comparable stores increased by 1.6%.

 

Gross Profit

 

Gross profit was $59.4 million for second quarter 2014, an increase of $7.5 million, or 14.4%, from $51.9 million for second quarter 2013.  Our gross margin increased 10 basis points to 32.4% for second quarter 2014 compared to 32.3% in second quarter 2013.  The increase in gross margin was primarily attributable to an improvement in merchandise gross margin partially offset by higher occupancy costs, as a percentage of sales,

 

24



Table of Contents

 

at our new stores and an increase in rent at one of our existing stores due to the expansion of the leased space.   We continue to refine our price optimization initiative, which involves increases and decreases to prices on certain items, lower prices from certain vendors and the continuing benefit of our shrink management initiative launched in fiscal 2009.  We calculate gross profit as net sales less cost of sales and occupancy costs, which includes the cost of merchandise inventory sold during the year (net of discounts and allowances), distribution costs, food preparation costs (primarily labor), shipping and handling costs and store occupancy costs.

 

Direct Store Expenses

 

Direct store expenses were $45.5 million in second quarter 2014, an increase of $7.0 million, or 18.1%, from $38.5 million for second quarter 2013.  The increase in direct store expenses was primarily attributable to the two new stores that we opened in fiscal 2013 subsequent to July 1, 2012 and the new store we opened in second quarter 2014. With more stores in operation during second quarter 2014, our store labor expenses increased $2.9 million and our other store operating expenses increased $3.1 million compared to second quarter 2013.  The portion of our depreciation expenses included in direct store expenses, which includes amortization of prepaid rent, increased $1.0 million or 22.1%, to $5.5 million for second quarter 2014, compared to direct store depreciation expenses for second quarter 2013 of $4.5 million.  The increase in direct store depreciation expense for second quarter 2014 compared with second quarter 2013 is primarily attributable to the increase in the number of stores.

 

Direct store expenses, as a percentage of net sales, increased 80 basis points to 24.8% in second quarter 2014 from 24.0% for second quarter 2013, primarily due to higher store operating expenses at our three new locations that opened subsequent to July 1, 2012, which is typical for new stores during the first few quarters of operations.

 

General and Administrative Expenses

 

General and administrative expenses were $15.1 million for second quarter 2014, a decrease of $0.7 million, or 4.5%, from $15.8 million for second quarter 2013.  The decrease in our general and administrative expenses was primarily attributable to a reduction in transaction fees and expenses of $3.8 million incurred in second quarter 2013 in connection with the refinancing of our 2011 senior credit facility, management fees of $0.7 million as a result of the termination of our management agreement with Sterling in connection with our IPO and other items of $0.1 million.  We recorded $2.8 million of stock compensation expense related to restricted stock unit and stock option grants for second quarter 2014, an increase of $2.8 million over the same period for the prior year.  The remaining increase in general and administrative expenses of $1.1 million is primarily due to an increase in costs associated with being a public company of $0.4 million and our continued investments in management, information technology systems, infrastructure, compliance and marketing to support our continued growth strategy. The portion of depreciation and amortization included in general and administrative expenses was $1.1 million for second quarter 2014, an decrease of $0.1 million, or 5.6%, from $1.1 million for second quarter 2013.  Excluding stock compensation expense and fees and expenses related to the refinancing of our 2011 senior credit facility, general and administrative expenses were $12.3 million for second quarter 2014, an increase of $0.3 million, or 2.4%, from $12.0 million for second quarter 2013.

 

General and administrative expenses, as a percentage of net sales, decreased to 8.2% for second quarter 2014, from 9.8% for second quarter 2013.  Excluding stock compensation of $2.8 million and fees and expenses related to the refinancing of our 2011 senior credit facility of $3.8 million, general and administrative expenses, as a percentage of sales, decreased to 6.7% for second quarter 2014 from 7.5% for second quarter 2013.

 

25



Table of Contents

 

The following table sets forth a reconciliation to Central Services from general and administrative expenses:

 

 

 

Thirteen Weeks Ended

 

 

 

September 30, 2012

 

September 29, 2013

 

(Dollars in thousands)

 

 

 

% of
Net
Sales

 

 

 

% of
Net
Sales

 

General and administrative expenses

 

$

15,773

 

9.8

%

$

15,067

 

8.2

%

Management fees

 

(690

)

(0.4

)

 

 

Transaction expenses

 

(2,778

)

(1.7

)

 

 

Transaction bonuses

 

(980

)

(0.6

)

 

 

Non-recurring items

 

(1,317

)

(0.8

)

(1,396

)

(0.8

)

Corporate depreciation and amortization

 

(1,116

)

(0.7

)

(1,054

)

(0.6

)

Equity compensation charge

 

(2

)

 

(2,769

)

(1.5

)

Pre-opening advertising costs

 

(1,123

)

(0.7

)

(1,029

)

(0.6

)

Central services

 

$

7,767

 

4.8

%

$

8,819

 

4.8

%

 

Store Opening Costs

 

Store opening costs were $3.9 million for second quarter 2014, a decrease of $1.6 million from $5.5 million for second quarter 2013.  Store opening costs for second quarter 2014 include approximately $1.9 million related to the store that opened in the Chelsea neighborhood of Manhattan on July 24, 2013 (several weeks later than the original target date) and $2.0 million for the store that opened on October 10, 2013 in Nanuet, NY.  Store opening costs for second quarter 2013 primarily consisted of $3.4 million for the Westbury, Long Island store we opened in August 2012 and $2.3 million for the new store we opened in December 2012 in the Kips Bay neighborhood of Manhattan.  Approximately $1.0 million and $0.7 million of store opening costs for second quarter 2014 and for second quarter 2013, respectively, did not require the expenditure of cash in the period, primarily due to deferred rent.

 

Production Center Start-up Costs

 

Start-up costs for the new production center in the Hunts Point area of the Bronx were $1.3 million for second quarter 2014.  Approximately $0.4 million of these costs did not require the expenditure of cash in the period, primarily due to deferred rent.

 

Loss from Operations

 

For second quarter 2014, our operating loss was $6.4 million, a decrease of $1.5 million from a loss of $7.9 million for second quarter 2013.  The decrease in the loss from operations was primarily attributable to increased gross profit and a slight reduction in general and administrative expenses, partially offset by stock compensation expense and an increase in direct store expenses and production center start-up costs.

 

Interest Expense

 

Interest expense decreased 13.6%, or $0.8 million, to $5.0 million for second quarter 2014, from $5.8 million for second quarter 2013, primarily due to lower interest rates resulting from the February 2013 senior credit facility, the subsequent May 2013 amendment to the existing senior credit facility to lower interest rates and the  retirement of a subordinated promissory note of approximately $7.3 million in March 2013, partially offset by an increase in the amortization of deferred financing fees and original issue discount of approximately $0.6 million and an increase in average borrowings related to the senior credit facility entered into in February 2013.  The cash portion of interest expense for each of second quarters 2014 and 2013 was $3.7 million and $5.1 million, respectively.

 

Income Taxes

 

We recorded an income tax provision of $0.8 million in second quarter 2014 compared to a benefit of $5.9 million in second quarter 2013.  This $6.7 million change in provision is primarily related to the fact that during second quarter 2014, we did not record any income tax benefit related to the operating losses and recognized income

 

26



Table of Contents

 

tax expense related to indefinite-lived intangible assets while in second quarter 2013 we recorded the income tax benefit of the operating losses.

 

Net Loss

 

Our net loss was $12.2 million for second quarter 2014, an increase of $4.4 million from a net loss of $7.8 million for second quarter 2013. The increase in net loss was primarily attributable to stock compensation expense, an increase in our income tax provision and an increase in direct store expenses and production center start-up costs, partially offset by increased gross profit and a decrease in store opening costs, transaction fees and expenses related to the refinancing of our 2011 senior credit facility and management fees.

 

Our adjusted net loss was $6.0 million for second quarter 2014, a decrease of $1.3 million, or 18.0% from second quarter 2013.  We define adjusted net loss as net loss plus any non-recurring expenses and any other non-cash charges which we believe may distort period to period comparison.

 

The following table sets forth a reconciliation to adjusted net loss from net loss:

 

 

 

Thirteen Weeks Ended

 

 

 

September 30, 2012

 

September 29, 2013

 

(Dollars in thousands)

 

 

 

% of
Net Sales

 

 

 

% of
Net Sales

 

Net loss

 

$

(7,827

)

(4.9

)%

$

(12,224

)

(6.7

)%

Management fees

 

690

 

0.4

 

 

 

Transaction expenses

 

2,778

 

1.7

 

 

 

Transaction bonuses

 

980

 

0.6

 

 

 

Non-recurring items

 

1,317

 

0.8

 

1,396

 

0.8

 

Non-cash interest

 

642

 

0.4

 

1,267

 

0.7

 

Equity compensation charge

 

2

 

 

2,769

 

1.5

 

Income tax (benefit) provision

 

(5,886

)

(3.7

)

804

 

0.4

 

Adjusted net loss

 

$

(7,304

)

(4.6

)%

$

(5,988

)

(3.3

)%

 

First Half Ended September 29, 2013 Compared With First Half Ended September 30, 2012

 

Net Sales

 

We had net sales of $370.0 million in first half 2014, an increase of $54.8 million, or 17.4%, from $315.2 million in first half 2013.  Approximately 94% of the increase, or $51.4 million, was attributable to the net sales from our four new stores we opened subsequent to March 31, 2013, consisting of the store in Woodland Park, NJ we opened in late June 2012, the store in Westbury, Long Island we opened in August 2012, the store in the Kips Bay neighborhood of Manhattan we opened in late December 2012 and the store in the Chelsea neighborhood of Manhattan we opened in late July 2013.  Net sales for the first half ended September 30, 2012 include sales related to the Easter and Passover holidays; however, these holidays occurred prior to the beginning of the first half ended September 29, 2013.

 

Comparable store sales increased 1.2% in first half 2014 compared to first half 2013.  Customer transactions in our comparable stores increased by 0.2% and the average transaction size at our comparable stores increased by 1.0%.

 

Gross Profit

 

Gross profit was $120.8 million for first half 2014, an increase of $18.2 million, or 17.7%, from $102.6 million for first half 2013.  Our gross margin increased 10 basis points to 32.6% for first half 2014 compared to 32.5% in first half 2013.  The increase in gross margin was primarily attributable to an improvement in merchandise gross margin partially offset by higher occupancy costs, as a percentage of sales, at our new stores and an increase in rent at one of our existing stores due to the expansion of the leased space.  We continue to refine our price optimization initiative, which involves increases and decreases to prices

 

27



Table of Contents

 

on certain items, lower prices from certain vendors and the continuing benefit of our shrink management initiative launched in fiscal 2009.  We calculate gross profit as net sales less cost of sales and occupancy costs, which includes the cost of merchandise inventory sold during the year (net of discounts and allowances), distribution costs, food preparation costs (primarily labor), shipping and handling costs and store occupancy costs.

 

Direct Store Expenses

 

Direct store expenses were $89.6 million in first half 2014, an increase of $16.6 million, or 22.8%, from $73.0 million for first half 2013.  The increase in direct store expenses was primarily attributable to the three new stores that we opened in fiscal 2013 (two of which opened during first half 2013) and the new store we opened in second quarter 2014. With more stores in operation during first half 2014, our store labor expenses increased $6.6 million and our other store operating expenses increased $7.2 million compared to first half 2013.  The portion of our depreciation expenses included in direct store expenses, which includes amortization of prepaid rent, increased $2.8 million or 34.7%, to $10.8 million for first half 2014, compared to direct store depreciation expenses for first half 2013 of $8.0 million.  The increase in direct store depreciation expense for first half 2014 compared with first half 2013 is primarily attributable to the increase in the number of stores.

 

Direct store expenses, as a percentage of net sales, increased 100 basis points to 24.2% in first half 2014 from 23.2% for first half 2013, primarily due to higher store operating expenses at our three new locations which opened subsequent to July 1, 2012, which is typical for new stores during the first few quarters of operations.

 

General and Administrative Expenses

 

General and administrative expenses were $49.0 million for first half 2014, an increase of $20.8 million, or 73.8%, from $28.2 million for first half 2013.  The increase in our general and administrative expenses was primarily attributable to expenses related to our IPO of $18.1 million, including $9.2 million to terminate the management agreement upon consummation of our IPO, $8.1 million of contractual bonuses paid to certain members of management upon consummation of our IPO and $0.8 million of other IPO related expenses.  We also recorded $4.8 million of stock compensation expense related to restricted stock unit and stock option grants for first half 2014, an increase of $4.8 million over the same period for the prior year as well as a $0.2 million increase in other items partially offset by a reduction in our non-recurring items of $4.8 million, inclusive of $3.8 million in fees and expenses related to the refinancing of our 2011 senior credit facility, and a reduction in management fees of $0.6 million.  The remaining increase in general and administrative expenses of $2.6 million is primarily due to an increase in costs associated with being a public company of $0.8 million and our continued investments in management, information technology systems, infrastructure, compliance and marketing to support our continued growth strategy. The portion of depreciation and amortization included in general and administrative expenses was $2.2 million for first half 2014, an increase of $0.1 million, or 2.4%, from $2.1 million for first half 2013.  Excluding fees and expenses related to the IPO, fees and expenses related to the refinancing of our 2011 senior credit facility and stock compensation expense, general and administrative expenses were $26.1 million for first half 2014, an increase of $1.7 million, or 6.9%, from $24.4 million for first half 2013.

 

General and administrative expenses, as a percentage of net sales, increased to 13.2% for first half 2014, from 8.9% for first half 2013.  Excluding fees and expenses related to our IPO of $18.1 million, fees and expenses related to the refinancing of our 2011 senior credit facility of $3.8 million and stock compensation expense of $4.8 million, general and administrative expenses, as a percentage of sales, decreased to 7.1% for first half 2014 from 7.7% for first half 2013.

 

28



Table of Contents

 

The following table sets forth a reconciliation to Central Services from general and administrative expenses:

 

 

 

Twenty-Six Weeks Ended

 

 

 

September 30, 2012

 

September 29, 2013

 

(Dollars in thousands)

 

 

 

% of
Net
Sales

 

 

 

% of
Net
Sales

 

General and administrative expenses

 

$

28,194

 

8.9

%

$

49,009

 

13.2

%

Management agreement termination

 

 

 

(9,200

)

(2.5

)

Contractual IPO bonuses

 

 

 

(8,105

)

(2.2

)

Other IPO-related expenses

 

 

 

(795

)

(0.2

)

Sub-total IPO transaction costs

 

 

 

(18,100

)

(4.9

)

Management fees

 

(1,442

)

(0.5

)

(877

)

(0.2

)

Transaction expenses

 

(2,778

)

(0.9

)

 

 

Transaction bonuses

 

(980

)

(0.3

)

 

 

Non-recurring items

 

(2,900

)

(0.9

)

(2,340

)

(0.6

)

Corporate depreciation and amortization

 

(2,117

)

(0.7

)

(2,167

)

(0.6

)

Equity compensation charge

 

(28

)

 

(4,824

)

(1.3

)

Pre-opening advertising costs

 

(1,827

)

(0.6

)

(2,018

)

(0.5

)

Central services

 

$

16,122

 

5.1

%

$

18,683

 

5.0

%

 

Store Opening Costs

 

Store opening costs were $6.9 million for first half 2014, a decrease of $4.4 million from $11.3 million for first half 2013.  Store opening costs for first half 2014 include approximately $4.8 million related to the store that opened in the Chelsea neighborhood of Manhattan on July 24, 2013 (several weeks later than the original target date) and $2.1 million for the store that opened on October 10, 2013 in Nanuet, NY.  Store opening costs for first half 2013 primarily consisted of $4.0 million for the store (including the integrated Fairway Wine & Spirits location) that we opened in Woodland Park, New Jersey in June 2012, $4.8 million for the Westbury, Long Island store we opened in August 2012 and $2.3 million for the store we opened in December 2012 in the Kips Bay neighborhood in Manhattan.  Approximately $1.3 million of store opening costs in both periods did not require the expenditure of cash in the period, primarily due to deferred rent.

 

Production Center Start-up Costs

 

Start-up costs for the new production center in the Hunts Point area of the Bronx were $1.8 million for first half 2014.  Approximately $0.5 million of these costs did not require the expenditure of cash in the period, primarily due to deferred rent.

 

Loss from Operations

 

For first half 2014, our operating loss was $26.6 million, an increase of $16.7 million from a loss of $9.9 million for first half 2013.  The increase in the loss from operations was primarily attributable to non-recurring expenses and fees incurred in connection with our IPO, stock compensation expense and an increase in direct store expenses and production center start-up costs, partially offset by increased gross profit and a decrease in store opening costs.

 

Interest Expense

 

Interest expense was $10.4 million for first half  2014and first half 2013, primarily due to an increase in the amortization of deferred financing fees and original issue discount of approximately $1.4 million and an increase in average borrowings related to the senior credit facility entered into in February 2013, partially offset by lower interest rates resulting from the February 2013 senior credit facility, the subsequent May 2013 amendment to the existing senior credit facility and the retirement of a subordinated promissory note of approximately $7.3 million in March 2013.  The cash portion of interest expense for each of first half 2014 and 2013 was $7.9 million and $9.3 million, respectively.

 

29



Table of Contents

 

Income Taxes

 

We recorded an income tax provision of $3.2 million in first half 2014 compared to a benefit of $8.6 million in first half 2013.  This $11.8 million change in provision is primarily related to the fact that during first half 2014, we did not record any income tax benefit related to the operating losses and recognized income tax expense related to indefinite-lived intangible assets while in first half 2013 we recorded the income tax benefit of the operating losses.

 

Net Loss

 

Our net loss was $40.2 million for first half 2014, an increase of $28.5 million from a net loss of $11.7 million for first half 2013. The increase in net loss was primarily attributable to expenses and fees related to our IPO, stock compensation expense, an increase in our income tax provision and an increase in direct store expenses and production center start-up costs, partially offset by increased gross profit and a decrease in store opening costs, transaction fees and expenses related to the refinancing of our 2011 senior credit facility and management fees.

 

Our adjusted net loss was $8.4 million for first half 2014, a decrease of $2.8 million, or 24.9% from first half 2013.  We define adjusted net loss as net loss plus any non-recurring expenses and any other non-cash charges which we believe may distort period to period comparison.

 

The following table sets forth a reconciliation to adjusted net loss from net loss:

 

 

 

Twenty-Six Weeks Ended

 

 

 

September 30, 2012

 

September 29, 2013

 

(Dollars in thousands)

 

 

 

% of
Net
Sales

 

 

 

% of
Net
Sales

 

Net loss

 

$

(11,708

)

(3.7

)%

$

(40,170

)

(10.9

)%

Management agreement termination

 

 

 

9,200

 

2.5

 

Contractual IPO bonuses

 

 

 

8,105

 

2.2

 

Other-IPO related expenses

 

 

 

795

 

0.2

 

Sub-total IPO transaction expenses

 

 

 

18,100

 

4.9

 

Management fees

 

1,442

 

0.5

 

877

 

0.2

 

Transaction expenses

 

2,778

 

0.9

 

 

 

Transaction bonuses

 

980

 

0.3

 

 

 

Non-recurring items

 

2,900

 

0.9

 

2,340

 

0.6

 

Non-cash interest

 

1,035

 

0.3

 

2,465

 

0.7

 

Equity compensation charge

 

28

 

 

4,824

 

1.3

 

Income tax (benefit) provision

 

(8,581

)

(2.7

)

3,207

 

0.9

 

Adjusted net loss

 

$

(11,126

)

(3.5

)%

$

(8,357

)

(2.3

)%

 

Liquidity and Capital Resources

 

Overview

 

Our primary sources of liquidity are cash generated from operations, proceeds from our IPO and borrowings under our senior credit facility. Our primary uses of cash are purchases of merchandise inventories, operating expenses, capital expenditures, primarily for opening new stores and infrastructure, and debt service. We believe that our cash on hand and the cash generated from operations, together with the borrowing availability under our senior credit facility, will be sufficient to meet our normal working capital needs for at least the next twelve months, including investments made, and expenses incurred, in connection with opening new stores. Our ability to continue to fund these items may be affected by general economic, competitive and other factors, many of which are outside of our control. If our future cash flow from operations and other capital resources are insufficient to fund our liquidity needs, we may be forced to reduce or delay our expected new store openings, sell assets, obtain additional debt or equity capital or refinance all or a portion of our debt. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within a few business days of the related sale.

 

30



Table of Contents

 

At September 29, 2013, we had $58.8 million in cash and cash equivalents and $18.4 million in borrowing availability pursuant to our senior credit facility. We were in compliance with all debt covenants under our senior credit facility as of September 29, 2013. Our senior credit facility is discussed below under “—Senior Credit Facility”.

 

We believe we have sufficient liquidity and capital resources to meet our current operating requirements and expansion plans; however, if we are able to secure additional financing at favorable terms we may choose to do so to provide more flexibility for future growth opportunities.

 

A summary of our operating, investing and financing activities are shown in the following table:

 

 

 

Twenty-Six Weeks
Ended

 

(Dollars in Thousands)

 

September 30,
2012

 

September 29,
2013

 

Net cash used in operating activities

 

$

(5,282

)

$

(13,216

)

Net cash used in investing activities

 

(31,363

)

(26,465

)

Net cash provided by financing activities

 

48,100

 

76,760

 

Net increase in cash and cash equivalents

 

$

11,455

 

$

37,079

 

 

Operating Activities

 

Net cash used in operating activities consists primarily of net loss adjusted for non-cash items, including depreciation and changes in deferred income taxes and the effect of working capital changes.

 

We used cash in operating activities of $5.3 million and $13.2 million during first half 2013 and 2014, respectively. The increase in cash used is primarily related to the non-recurring costs of $17.8 million associated with our IPO and increased working capital needs related to new store openings, including Red Hook, partially offset by $3.9 million of insurance proceeds.

 

Investing Activities

 

Cash used in investing activities consists primarily of capital expenditures for opening new stores and infrastructure, as well as investments in information technology and merchandising enhancements.

 

We made capital expenditures of $31.4 million in first half 2013, of which $10.3 million was in connection with the store (which includes an integrated Fairway Wines & Spirits location) we opened in Woodland Park, NJ in June 2012, $13.8 million was in connection with the store we opened in Westbury, NY in August 2012 and $3.5 million was in connection with the store we opened in the Kips Bay neighborhood of Manhattan in December 2012.  The remaining approximately $3.8 million of capital expenditures in this period was for merchandising initiatives and equipment upgrades and enhancements to existing stores.

 

We made capital expenditures of $26.5 million in first half 2014, of which $10.8 million was in connection with the store we opened in the Chelsea neighborhood of Manhattan in July 2013, $9.6 million was in connection with the store we opened in Nanuet, NY in October 2013 and $1.3 million was in connection with our new production facility.  The remaining approximately $4.8 million of capital expenditures includes $1.0 million related to re-opening our Red Hook store,, $0.7 million related to the opening of our Kips Bay store and the remaining $3.1 million was for merchandising initiatives and equipment upgrades and enhancements to existing stores.

 

We plan to spend approximately $25 million to $35 million on capital expenditures during the remainder of fiscal 2014, primarily related to the expansion of the initial phase of our new central production facility and the store we plan to open in Lake Grove, NY in Spring 2014.

 

31



Table of Contents

 

Financing Activities

 

Cash flows from financing activities consists principally of borrowings and payments under our senior credit facility, and proceeds from the issuance of capital stock, net of equity issuance costs. We currently do not intend to pay cash dividends on our common stock.

 

 

 

Twenty-Six Weeks Ended

(Dollars in thousands)

 

September 30, 2012

 

September 29, 2013

 

Proceeds from long-term debt, net

 

$

256,225

 

$

 

Payments on long-term debt

 

(208,125

)

(1,375

)

Proceeds from issuance of common stock, net of issuance costs

 

 

158,821

 

Cash dividends paid on preferred stock

 

 

(76,818

)

Issuance costs for debt re-pricing

 

 

(3,868

)

Net cash provided by financing activities

 

$

48,100

 

$

76,760

 

 

Net cash provided by financing activities during first half 2013 was $48.1 million, representing net proceeds from our 2012 Term Facility, offset by principal repayments on our outstanding debt.

 

Net cash provided by financing activities during first half 2014 was $76.8 million, consisting principally of $158.8 million of net proceeds received from our IPO offset by the $76.8 million cash dividend payment on our preferred stock made with the proceeds of such offering and $3.9 million of costs related to our debt re-pricing as well as principal payments on our outstanding debt of $1.4 million.

 

On April 22, 2013, we completed our IPO of 15,697,500 shares of our common stock at a price of $13.00 per share, which included 13,407,632 new shares sold by Fairway and the sale of 2,289,868 shares by existing stockholders (including 2,047,500 sold pursuant to the underwriters’ exercise of their over-allotment option). We received approximately $158.8 million in net proceeds from the IPO after deducting the underwriting discount and expenses related to our IPO. We used the net proceeds that we received from the IPO to (i) pay accrued but unpaid dividends on our Series A preferred stock totaling approximately $19.1 million, (ii) pay accrued but unpaid dividends on our Series B preferred stock totaling approximately $57.7 million, (iii) pay $9.2 million to an affiliate of Sterling in connection with the termination of our management agreement with such affiliate and (iv) pay contractual IPO bonuses to certain members of our management totaling approximately $8.1 million. We intend to use the remainder of the net proceeds, approximately $64.7 million, for new store growth and other general corporate purposes. During first half 2014, we used approximately $15.1 million of the proceeds for capital expenditures and pre-opening costs in connection with our new store in the Chelsea neighborhood of Manhattan, which opened in July 2013, approximately $11.6 million for capital expenditures and pre-opening costs in connection with the store we opened in October 2013 in Nanuet, NY, approximately $3.0 million of the proceeds in connection with capital expenditures in our other stores and approximately $2.5 million of the proceeds in connection with capital expenditures and start-up costs at our new production facility.  We did not receive any of the proceeds from the sale of shares by the selling stockholders.

 

Senior Credit Facility

 

In February 2013, we and our wholly-owned subsidiary Fairway Group Acquisition Company, as the borrower, entered into a senior secured credit facility consisting of a $275 million term loan (the “Term Facility”) and a $40 million revolving credit facility, which includes a $40 million letter of credit subfacility (the “Revolving Facility” and together with the Term Facility, the “Credit Facility”), with the Term Facility maturing in August 2018 and the Revolving Facility maturing in August 2017. We used the proceeds from the Term Facility to repay the $264.5 million of outstanding borrowings (including accrued interest) under our prior senior credit facility, pay fees and expenses and provide us with $3.5 million to repay our outstanding subordinated note, which we repaid in March 2013. In May 2013, we amended the Credit Facility to further reduce the interest rate we pay under the Credit Facility.

 

Borrowings under the Credit Facility, as amended, bear interest, at our option, at (i) adjusted LIBOR (subject to a 1.0% floor) plus 4.0% or (ii) an alternate base rate plus 3.0%. The 4.0% and 3.0% margins will each be reduced by 50 basis points at any time when our public corporate family rating from Moody’s Investor Services Inc. is B2 or higher and our public corporate rating from Standard & Poors rating service is B or higher, in each case with a stable outlook, and as long as certain events of default have not occurred. In addition, there is a fee payable

 

32



Table of Contents

 

quarterly in an amount equal to 1% per annum of the undrawn portion of the Revolving Facility, calculated based on a 360-day year. Interest is payable quarterly in the case of base rate loans and on maturity dates or every three months, whichever is shorter, in the case of adjusted LIBOR loans.

 

All of the borrower’s obligations under the Credit Facility are unconditionally guaranteed (the “Guarantees”) by us and each of our direct and indirect subsidiaries (other than the borrower and any future unrestricted subsidiaries as we may designate, at our discretion, from time to time) (the “Guarantors”). Additionally, the Credit Facility and the Guarantees are secured by a first-priority perfected security interest in substantially all present and future assets of the borrower and each Guarantor, including accounts receivable, equipment, inventory, general intangibles, leases, intellectual property, investment property and intercompany notes among Guarantors.

 

Mandatory prepayments under the Credit Facility are required with (i) 50% of adjusted excess cash flow (which percentage will decrease to 25% upon achievement and maintenance of a leverage ratio of less than 5.0:1.0, and to 0% upon achievement and maintenance of a leverage ratio of less than 4.0:1.0); (ii) 100% of the net cash proceeds of assets sales or other dispositions of property by us and our restricted subsidiaries (subject to certain exceptions and reinvestment provisions); and (iii) 100% of the net cash proceeds of issuances, offerings or placements of debt obligations (subject to certain exceptions). In addition, the Credit Facility required that by May 15, 2013, the Company either fully repay its outstanding subordinated note or make a $7.7 million repayment of the outstanding term loan.  On March 7, 2013, the Company repaid in full its outstanding subordinated promissory note in the aggregate principal amount of $7.3 million, together with all accrued interest aggregating $440,000.

 

The Credit Facility contains customary affirmative covenants, including (i) maintenance of legal existence and compliance with laws and regulations; (ii) delivery of consolidated financial statements and other information; (iii) maintenance of properties in good working order; (iv) payment of taxes; (v) delivery of notices of defaults, litigation, ERISA events and material adverse changes; (vi) maintenance of adequate insurance; and (vii) inspection of books and records.

 

The Credit Facility also contains customary negative covenants, including restrictions on (i) the incurrence of additional debt; (ii) liens and sale-leaseback transactions; (iii) loans and investments; (iv) guarantees and hedging agreements; (v) the sale, transfer or disposition of assets and businesses; (vi) dividends on, and redemptions of, equity interests and other restricted payments, including dividends and distributions to the issuer by its subsidiaries; (vii) transactions with affiliates; (viii) changes in the business conducted by us; (ix) payment or amendment of subordinated debt and organizational documents; and (x) maximum capital expenditures. We are also required to comply with a maximum total leverage ratio financial covenant.

 

Events of default under the Credit Facility include:

 

·                                           failure to pay principal, interest, fees or other amounts under the Credit Facility when due, taking into account any applicable grace period;

 

·                                           any representation or warranty proving to have been incorrect in any material respect when made;

 

·                                           failure to perform or observe covenants or other terms of the Credit Facility subject to certain grace periods;

 

·                                           a cross-default and cross-acceleration with certain other debt;

 

·                                           bankruptcy events;

 

·                                           a change in control, which includes any person other than Sterling Investment Partners owning, directly or indirectly, beneficially or of record, shares representing more than 35% of the voting power of our outstanding common stock or a majority of our directors being persons who were not nominated by the board or appointed by directors so nominated;

 

·                                           certain defaults under ERISA; and

 

·                                           the invalidity or impairment of any security interest.

 

The foregoing is a brief summary of the material terms of the Credit Facility, and is qualified in its entirety by reference to the Credit Facility filed as an exhibit to our Annual Report on Form 10-K for the fiscal year ended March 31, 2013.

 

33



Table of Contents

 

Critical Accounting Policies and Estimates

 

The preparation of our financial statements in conformity with US GAAP requires us to make estimates, assumptions and judgments that affect amounts of assets and liabilities reported in the consolidated financial statements, the disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the year. We believe our estimates and assumptions are reasonable; however, future results could differ from those estimates under different assumptions or conditions.

 

Critical accounting policies are policies that reflect material judgment and uncertainty and may result in materially different results using different assumptions or conditions. We identified the following critical accounting policies and estimates: merchandise inventories, goodwill and other intangible assets, impairment of long-lived assets, income taxes and stock-based compensation.  For a detailed discussion of accounting policies, refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2013.

 

34



Table of Contents

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no material changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of our Annual Report on Form 10-K for the fiscal year ended March 31, 2013, except that the interest rate cap agreement that we had entered into with respect to our prior senior credit facility covering $ 120 million notional amount of the term loan expired on July 19, 2013.

 

Item 4. Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), our chief executive officer and chief financial officer, together with our management, evaluated Fairway’s disclosure controls and procedures as of September 29, 2013, the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer concluded that Fairway’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

In connection with the evaluation described above, there were no changes in our internal control over financial reporting during the quarter ended September 29, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

35



Table of Contents

 

Part II — Other Information

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

There were no material changes in risk factors for the Company in the period covered by this report. See the discussion of risk factors in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2013.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Sales of Unregistered Securities

 

From July 1, 2013 through September 29, 2013, we granted to our officers, directors, employees and consultants an aggregate of 39,000 restricted stock units to be settled in shares of our Class A common stock and options to purchase an aggregate of 25,000 shares of Class A common stock under our 2013 Long-Term Incentive Plan.

 

Use of Proceeds

 

On April 22, 2013, we completed our IPO of 15,697,500 shares of our common stock at a price of $13.00 per share, which included 13,407,632 new shares sold by Fairway and the sale of 2,289,868 shares by existing stockholders (including 2,047,500 sold pursuant to the underwriters exercise of their over-allotment option). We received approximately $158.8 million in net proceeds from the IPO after deducting the underwriting discount and expenses related to our IPO. We used the net proceeds that we received from the IPO to (i) pay accrued but unpaid dividends on our Series A preferred stock totaling approximately $19.1 million, (ii) pay accrued but unpaid dividends on our Series B preferred stock totaling approximately $57.7 million, (iii) pay $9.2 million to an affiliate of Sterling in connection with the termination of our management agreement with such affiliate and (iv) pay contractual initial public offering bonuses to certain members of our management totaling approximately $8.1 million. We intend to use the remainder of the net proceeds, approximately $64.7 million, for new store growth and other general corporate purposes, and during the twenty-six weeks ended September 29, 2013, we used approximately $15.1 million of the proceeds in connection with the opening of our new store in the Chelsea neighborhood of Manhattan in July 2013, approximately $11.6 million of the proceeds in connection with the store we opened in October 2013 in Nanuet, NY, approximately $3.0 million of the proceeds in connection with capital expenditures for our other stores and approximately $2.5 million of the proceeds in connection with capital expenditures and start-up costs at our new production facility.  We did not receive any of the proceeds from the sale of shares by the selling stockholders.

 

Issuer Purchases of Equity Securities

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Reference is made to the separate exhibit index contained on page 37 filed herewith.

 

36



Table of Contents

 

Signatures

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Fairway Group Holdings Corp.

 

 

 

 

By:

/s/ Herbert Ruetsch

 

 

Herbert Ruetsch

 

 

Chief Executive Officer

 

 

 

 

Date: November 7, 2013

 

 

 

 

By:

/s/ Edward C. Arditte

 

 

Edward C. Arditte

 

 

Executive Vice President—Chief Financial Officer

 

 

 

 

Date: November 7, 2013

 

 

 

 

By:

/s/ Linda M. Siluk

 

 

Linda M. Siluk

 

 

Vice President—Finance &
Chief Accounting Officer

 

 

 

 

Date: November 7, 2013

 

37



Table of Contents

 

Exhibit Index

 

Exhibit
Number

 

Description

21.1

 

 

Subsidiaries of Fairway Group Holdings Corp.

31.1

 

 

Certification Statement of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

 

Certification Statement of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

#

 

Certification Statement of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

#

 

Certification Statement of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

*

 

XBRL Instance Document

101.SCH

*

 

XBRL Taxonomy Extension Schema Document

101.CAL

*

 

XBRL Taxonomy Calculation Linkbase Document

101.DEF

*

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

*

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

*

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


# This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act.

 

* Pursuant to applicable securities laws and regulations, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, are deemed not filed for purposes of section 18 of the Exchange Act and otherwise are not subject to liability under these sections.

 

38


Exhibit 21.1

 

SUBSIDIARIES OF FAIRWAY GROUP HOLDINGS CORP.

 

Subsidiary

 

Jurisdiction of Incorporation or Formation

Fairway Group Acquisition Company

 

Delaware

Fairway Bakery LLC

 

Delaware

Fairway Broadway LLC

 

Delaware

Fairway Chelsea LLC

 

Delaware

Fairway Construction Group, LLC

 

New York

Fairway Douglaston LLC

 

Delaware

Fairway East 86th Street LLC

 

Delaware

Fairway eCommerce LLC

 

Delaware

Fairway Group Central Services LLC

 

Delaware

Fairway Group Plainview LLC

 

Delaware

Fairway GS LLC

 

Delaware

Fairway Hudson Yards LLC

 

Delaware

Fairway Kips Bay LLC

 

Delaware

Fairway Lake Grove LLC

 

Delaware

Fairway Nanuet LLC

 

Delaware

Fairway Paramus LLC

 

Delaware

Fairway Pelham LLC

 

Delaware

Fairway Pelham Wines & Spirits LLC

 

Delaware

Fairway Red Hook LLC