Stock in Fairway Group Holdings was down by more than 21% Wednesday following Tuesday evening’s announcement of quarterly losses and sales declines more severe than Wall Street had anticipated.
The company which operates New York’s Fairway Markets chain, lost $13.9 million in the quarter ended June 27, with sales of $198.3 million down 2.3% and comps down 5.3%. EBITDA of $9.1 million was down 8.2% and below consensus estimates of $11.1 million.
CEO Jack Murphy, discussing results in a conference call, urged analysts to look beyond the poor results and put faith in his plan to recapture top-line sales, but acknowledged that doing so would likely put a damper on earnings for several quarters to come.
That effort is already underway, as Fairway plowed $2.8 million into promotions and coupons during the first quarter, Murphy said. The program includes a mobile number acquisition program that involves exchanging discounts for customer phone numbers, that has grown Fairway’s text-message database from 6,000 to more than 100,000 numbers.
Visitors to Fairway’s website who provide a mobile number can “throw a cleaver” at a bullseye to receive a bonus coupon granting up to $25 off a $100 purchase.
Murphy said the text messaging effort is resulting in high conversion rates and increases in trips and items per basket, particularly at its stores in suburban Pelham, N.Y. and Douglaston, N.Y. Stores in New York City — particularly an Upper East Side unit whose sales are down near 15% as a result of a competitive Whole Foods opening — are still hurting.
“You could say to me, ‘Well, Jack, you don't seem to have gotten much of a sales boost from this initial foray?’ On the basis of the short-term numbers, you are right,” Murphy told analysts. “But we are beginning to see the beginnings of some very good returns in some of our suburban stores, and we are building this program and this strategy for the long-term. So it's not about buying quick sales, it's not about boosting margins irresponsibly. It's about a long-term commitment to responsibly build a really great company.”
Murphy said these efforts could push Fairway to positive sales within 12 to 18 months. “The top line will take time and it will require investment that may impact these short-term results, but management is here to build a long-term strategy, and we believe this will ultimately produce value to the investors.”
Murphy reiterated plans to proceed with smaller, less costly new stores beginning next spring with a new store in Brooklyn at the site of a Waldbaums currently operating in the Georgetown neighborhood. He added that the company's unit in New York's Tribeca neighborhood would be smaller than initially envisioned.
Kelly Bania, an analyst at BMO Capital, in a note to clients said Fairway’s small store base remains vulnerable to competitive openings and adjusted her forecast to reflect a slower comp sales rebound than initially expected. “We continue to believe that the company faces significant executional hurdles that keep us cautious,” including questions about the rollout schedule and performance of Fairway’s new stores; and the costs of further investments in advertising and customer acquisitions.
Andrew Wolf, an analyst at BB&T Capital Market also trimmed fiscal 2016 and 2017 earnings forecasts to reflect the more severe losses.
This article, published Wednesday morning, has been updated to reflect Wednesday's closing stock price.
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