Analysis: Fairway’s new owners betting on ‘monumental’ turnaround

May 4, 2016

Jon Springer, Supermarket News

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.

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.”