Analysis: Fairway's new owners betting on 'monumental' turnaround
"The good news is Fairway is not going straight into liquidation like A&P. At the same time, it's a turnaround of monumental proportions." —Burt P. Flickinger III, Strategic Resource Grou
The lenders-turned-owners of Fairway Markets are betting on a fast-moving, bankruptcy-aided turnaround for the beleaguered New York icon — and hoping to avoid the fate of the last area grocer to go Chapter 11.
"The good news is Fairway is not going straight into liquidation like A&P," Burt P. Flickinger III, managing director of New York's Strategic Resource Group, told SN in an interview Tuesday. "At the same time, it's a turnaround of monumental proportions."
Fairway Group Holdings, the owner of the 15-store chain, on Tuesday filed a prepackaged Chapter 11 bankruptcy intended to relieve near-term debt pressures and provide a new shot of capital to feed a company starving for investment in its stores and marketing. The plan calls for holders of the chain's $279 million in senior debt to exchange that for equity in the company and $84 million of new debt of the reorganized company. Annual debt obligations would be reduced by $8 million.
The proposed deal came only after numerous attempts to find a new owner for Fairway came up empty, the company acknowledged.
The plan has the support of 70% of the chain's senior debt holders. Fairway said vendors and employees would continue to be paid, although it wipes out previous holders of Fairway stock including majority shareholder Sterling Investment Partners, holders of more than 27% of Fairway's publicly traded Class A shares.
"The main risk for the lenders-turned-equity holders is that performance continues to lag and makes it difficult for the company to service its new capital structure," Jude Gorman, Reorg Research’s general counsel, told SN. "Though this is principally a balance sheet restructuring, the company has not been performing up to its plan, and continued underperformance could further damage the company and its new owners."
On that count, the company in a disclosure statement expressed support for initiatives taken prior to the bankruptcy filing by veteran CEO Jack Murphy and his team, including moves to streamline costs and exit costly proposed stores, installation of a slate of new head merchants and senior leaders, and the ratification of more cost-efficient labor agreements with union workers. A test of Murphy's new merchandising and marketing initiatives — limited by cost constraints to Fairway's store in Douglaston, N.Y. — helped turn negative comp-sales positive, the company noted.
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Murphy, the former CEO of Earth Fare who came out of retirement to lead Fairway in 2014, said late last year that such behind-the-scenes moves prepared the chain for growth, but that debt service denied the company the "dry powder" required to execute a turnaround.
"We have a lot of constraints around being able to compete, not only in getting the message out to the people who would be interested in it and also being able to get and compete against the very strong competitors that we have, who inundate the airwaves, and newspapers, and mail every single week. Fairway has not had the ability, for obvious reasons, to overspend in that area without a strong and consistent capital structure," he said during a conference call in late October.
He added, however: "This company is ready. This company is primed in an area to grow where we are well-known, well thought of, and have a great customer loyalty. So we are going to maximize that in order to build this company back to its prominence that it has had for many years in the greater New York area."
Five boroughs
Murphy's explicit call to focus growth in the five boroughs of New York points to a likely streamlining of stores elsewhere. In particular, Fairway officials in a court hearing this week acknowledged that its store in the Long Island town of Lake Grove, N.Y. was "not a money generator" and that officials were considering whether to continue operating it, Reorg Research noted.
Fairway's Lake Grove affiliate — which opened the store shortly before Murphy joined as CEO in 2014 — was the only affiliate company of Fairway not to file as a debtor.
One area industry observer, who asked not to be identified, told SN Tuesday that a key to Fairway's turnaround was to "recreate the charisma," it had a decade ago, when it opened a spectacularly successful superstore in Brooklyn's Red Hook neighborhood that rung industry-leading sales-per-square-foot figures.
That store built on the fresh and specialty equity of Fairway's Manhattan stores while adding competitively priced grocery in a spectacular waterfront setting. Fairway however found that productivity difficult to sustain in forays outside of the city, while competitors — Whole Foods in particular — siphoned Fairway's sales in Brooklyn and Manhattan by subsequently opening neighboring superstores of its own.
Fairway has also been beset by nontraditional competition, the company acknowledged.
"The influence of technology and eCommerce has had a larger impact on Fairway than competitors in other markets," the company said in its disclosure statement filed Tuesday. "This is due to Fairway’s concentration in the dense urban New York market where consumers are more willing to pay for the convenience of home delivery for certain items in their grocery basket. Further, New York often serves as a test-market or launch market for product innovations. As such, Fairway has been more affected than other grocers by the proliferation of online retailers, online grocers, delivery services, and meal kits."
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Fairway said the de-leveraging and new DIP and exit financing proposed in the Chapter 11 plan would provide "excess capital to invest in and grow its business."
But it must first dig out of a hole: Same-store sales were down by 6% in the 52 weeks ended April 3. For the nine months ended Dec. 27, Fairway lost $36 million on sales of $565 million. Projected financials included in the plan suggest Fairway would continue to lose money through fiscal year 2019, although while growing sales and posting positive adjusted EBITDA.
For fiscal 2017, which began in April, Fairway projects a net loss of $23.3 million on sales of $720.1 million. Sales are projected to grow to $731.3 million and and $761.1 million in fiscal 2018 and 2019, respectively, while respective net losses in those years narrow to $16.8 million and $11.2 million.
The projected financials assume the company would exit Chapter 11 as a private company on July 3.