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Moody’s downgrades Fairway ratings

CEO cites progress in spite of weak credit, increasing competition

An already difficult turnaround underway at Fairway Markets could get trickier now that Moody’s Investor Service has downgraded its ratings on its parent company by one notch.

Moody’s last week cut both Fairway’s corporate family rating and its probability of default from Caa1 to Caa2 – ratings considered to be subject to very high credit risk. Sources said the downgrade would likely increase Fairway’s cost of capital as it attempts to regain footing following years of financial underperformance that led to a stay in Chapter 11 bankruptcy.

"Although Fairway emerged from bankruptcy in 2016 with a lower debt burden, it's operating performance continues to deteriorate as it faces a very difficult operating environment including intense competitive pricing pressure,” Moody's VP Mickey Chadha said in a statement accompanying the downgrade release. "With competitive openings in Fairway's geographic markets expected to continue from the likes of Wegmans and Whole Foods, improving profitability to a level that can support its capital structure will be very challenging for Fairway.”

Fairway enjoys strong brand equity in produce, olive oil, coffee and cheese.

Abel Porter, the industry veteran named Fairway’s CEO in March of this year, took the bad news in stride, saying the rating change would not interfere with a turnaround that despite its early stages and limits to financial fuel has already cut Fairway’s same-store sales declines by around 80% since he took over, while doing a better job of fending off the negative impacts of competition.

“The risk has always been here, but things are getting better,” he told SN in an interview Wednesday.

Fairway is an iconic New York-based retailer that operates 15 stores and four wine and liquor outlets in Metro New York and had sales in excess of $675 million for the fiscal year ended April 2.

Porter said the turnaround involves thoughtful use of capital for minor remodels, expansion of conveniences like e-commerce, a renewed effort to keep stores clean and an emphasis on aggressive pricing and marketing in categories where Fairway has strong brand equity such as coffee, olive oil, cheeses, and fresh meats and produce.

The company for example is building e-commerce behind a newly announced offer to provide free delivery on online orders of more than $99 through Labor Day, through Instacart.

Moody’s said Fairway’s near-term liquidity was “adequate” and that its cash balance and cash from operations were sufficient to fund working capital for the next year. However, its alternatives for additional funding are limited as its current assets are already pledged to existing credit facilities, Moody’s noted.

“We don’t have the luxury to buy a new car,” Porter confessed, “but we can put on a good coat of wax and shine up the rims and tires.”

Moody’s rating change also reflected its expectations that competition could eat into Fairway’s business, although Porter characterized Fairway today as better able to withstand competition than it was in recent years, when Whole Foods openings resulted in prolonged sales slumps at area Fairway stores. Fairway was also its own enemy at times when its aggressive expansion earlier this decade resulted in some cannibalization.

Porter said for example that a new Trader Joe’s in Brooklyn has not impacted sales at its stores there. A Whole Foods opening later this month in Harlem “will give us a haircut,” he said, “but a haircut on a high-volume store.” Wegmans won’t make its Brooklyn debut until mid-2019 although that store recently posted a job notice seeking culinary management trainees.

Burt P. Flickinger III, managing director of Strategic Resource Group, in an interview Thursday told SN he was impressed with progress at Fairway which he said was beset also by effects of professional fees associated with its bankruptcy.

“Abel’s done a Herculean job turning Fairway around given the difficult hand he was dealt,” Flickinger said. “The war is not over yet but Fairway is winning for the first time in five years.”

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