Crains New York - October 8, 2012 - (Page 4)

IN THE MARKETS by Aaron Elstein Fairway debt: ‘Like no other market’ F airway describes itself as being “like no other market,” and the foodies who flock to its stores for Umbrian olive oil and free-range fowl would certainly agree. But actually, it’s like a lot of other supermarket operators—struggling to keep its head above water in an ultracompetitive business. Perhaps its most distinguishing characteristic is how deeply in debt it is. This financial information was revealed last month, when the 79-year-old supermarket chain filed documents to raise $150 million in an initial public offering. In the process, Fairway leaped ahead of hip new retailers and media companies like Gilt Groupe and Foursquare in the race to become the highest-profile IPO of a New York company in many years. Anyone who’s navigated through hoards of weekend shoppers hell-bent on arugula knows what a beloved institution Fairway has become. But that doesn’t mean it’s a stock you want to own. First, the vital statistics: Fairway Group Holdings Corp. generated $555 million in sales in the fiscal year ended April 1, an impressive 14% increase over the prior year and 60% more than in 2009. The store count has doubled over the past four years, to 11, and management reckons that number could triple in the New York area and grow to more than 300 nationwide. Clearly, this is a company on the move. Digging out Trouble is, Fairway reported a $37 million net loss last year, has piled up $110 million in losses over the past four years and warns it won’t turn profitable until 2014 at the soonest. On top of that, it’s burdened with $260 million in debt. “This sounds to me like a company that’s going bankrupt, not one We congratulate our client A Fairway spokeswoman didn’t return requests for comment on Mr. Schaeffer’s observation. It won’t be easy for Fairway to dig itself out of its financial hole. According to its prospectus, most of the IPO’s proceeds will be used to pay back Sterling Investment Partners, a private-equity firm that bought a majority stake in Fairway from the founding Glickberg family in 2007. Fairway owes Sterling an undisclosed amount of accrued dividends. The grocer has also promised to buy back an unspecified amount of preferred shares and to pay a Sterling affiliate for terminating a management agreement. Sterling holds 78.5% of the company’s voting stock and will remain in control after the IPO. Peter Schaeffer, a partner at investment bank Carl Marks Advisory Group. that should be going public,” said FAIRWAY RESULTS Sales (in millions) Losses (in millions) $555 $486 $401 $343 $10.8 2009 $23.8 2010 $39.0 2011 $36.7 2012 Source: Prospectus on the $525MM financing of the acquisition by of the blood collection, filtration and processing product lines of ‘A real gamble’ The situation with Sterling leads to some uncomfortable math for Fairway. Suppose the grocer were to use $100 million of its IPO money to pay Sterling and reduce its debt. That would leave it with just $50 million in cash to expand, plus about $160 million in borrowings. Servicing the debt would cost $13 million a year, estimated Mr. Schaeffer, who said it would erode Fairway’s capacity to open new stores. Tim Ghriskey, co-founder of Solaris Asset Management, is also skeptical. “The debt load is just huge, and the growth scenario isn’t all that compelling,” he said. “This is a real gamble.” But Fairway has some considerable strengths, not least of which is the fact that many shoppers, including Mr. Ghriskey’s wife, go out of their way to shop there for hard-tofind specialty items. Its gross margins are similar to those of Whole Foods, and its profit margins are triple those of Safeway. (Yet those profit margins aren’t all they might seem, because Fairway’s definition of operating earnings does not include business expenses for things like store openings and executive recruiting.) Also in Fairway’s corner is the fact that investors are hungry for food-related IPOs.Two of the year’s hottest offerings have come from Annie’s Inc., which sells organic macaroni and cheese, and retailer Natural Grocers by Vitamin Cottage Inc. “Fairway is clearly trying to provide a second chance to investors who missed on the earlier high-end supermarket concepts,” said David Menlow, president of IPO Financial Network, a New Jersey-based research firm. Two more caveats, though, for potential Fairway shareholders: While management considers Fairway’s brand “iconic,” it is restricted from using the name outside the East Coast and California, the prospectus said. It’s not clear why that’s the case, but one thing is certain: Management would have to enter many new markets under a different name. That sounds like a tough sell. The company values its brand name at $23.6 million. Perhaps that’s accurate. But it’s worth noting that the naming rights to one of the best-known restaurants in the nation, Tavern on the Green, fetched $1.3 million at auction last year. “There’s no way Fairway’s name is worth what they say it is,” Mr. Schaeffer said. LISTEN to a discussion at CrainsNewYork.com/podcasts 88% Want more info on our done deals? Scan the QR Code with your smart phone. GAIN IN the share price of watchmaker Movado Group this year, making it the second-best performer in the Bloomberg/Crain’s index of New York area companies. Movado expects earnings to grow by 30% this year. 4 | Crain’s New York Business | October 8, 2012 newscom http://www.CrainsNewYork.com/podcasts http://www.goulstonstorrs.coom

Table of Contents for the Digital Edition of Crains New York - October 8, 2012

IN THE BOROUGHS
IN THE MARKETS
THE INSIDER
BUSINESS PEOPLE
CORPORATE LADDER
FROM AROUND THE CITY
OPINION
GREG DAVID
THE LIST
REAL ESTATE DEALS
CLASSIFIEDS
SMALL BUSINESS
NEW YORK, NEW YORK
SOURCE LUNCH
OUT AND ABOUT
SNAPS

Crains New York - October 8, 2012