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Fairway Group Holdings Corp. Reports Second Quarter Results

Stocks in this article: FWM

Adjusted EBITDA increased 4.7% to $10.6 million in the second quarter of fiscal 2014 from $10.1 million in the second quarter of fiscal 2013. The increase was primarily due to the contribution from new stores and an improvement in gross margin. Adjusted EBITDA was adversely affected by an increase in insurance costs of approximately $0.5 million and an increase in public company costs of approximately $0.4 million. The Adjusted EBITDA margin was 5.8% in the quarter compared to 6.3% in the same period of the prior year. The decrease in the Adjusted EBITDA margin was primarily due to higher operating expenses, as a percentage of sales, at the three new stores opened subsequent to July 1, 2012, which is typical for new locations during the first few quarters of operations, an increase in public company expenses, an increase in insurance expenses and the cycling of the opening period for both the Woodland Park, NJ store and the Westbury, Long Island store which had the benefit of above average volumes and margins during the second quarter of fiscal 2013. See the discussion under "Supplemental Non-GAAP Financial Disclosure" below for an explanation of Adjusted EBITDA.

The following table sets forth a reconciliation to Adjusted EBITDA from Net Loss:

EBITDA Reconciliation ($ in millions, % of net sales)
         
Quarter Ended: September 30, 2012 September 29, 2013
         
Net Loss  $ (7.8) (4.9%)  $ (12.2) (6.7%)
         
(+) Transaction expenses  2.8 1.7%  -  0.0%
(+) Transaction bonuses  1.0 0.6%  -  0.0%
(+) Management fees  0.7 0.4%  -  0.0%
(+) Non-recurring expenses   1.3 0.8%  1.4 0.8%
(+) Interest expense, net   5.8 3.6%  5.0 2.7%
(+) Income tax (benefit) expense   (5.9) (3.7%)  0.8 0.4%
(+) Store depreciation & amortization   4.5 2.8%  5.5 3.0%
(+) Corporate depreciation & amortization   1.1 0.7%  1.1 0.6%
(+) Equity compensation charge   0.0 0.0%  2.8 1.5%
(+) Store opening costs   5.5 3.4%  3.9 2.1%
(+) Production center start-up costs  -  0.0%  1.3 0.7%
(+) Pre-opening advertising  1.1 0.7%  1.0 0.6%
Adjusted EBITDA  $ 10.1 6.3%  $ 10.6 5.8%

Other Operating Items

Gross profit in the second quarter increased $7.5 million, or 14.4%, to $59.4 million from $51.9 million and the gross margin improved to 32.4% from 32.3% in the prior year. The increase in the gross margin was primarily due to an increase in the merchandise margin partially offset by higher occupancy costs, as a percentage of sales, at our new locations and an increase in rent at one of our existing locations due to the expansion of the leased space.

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