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Fairway Group Holdings (NASDAQ:FWM)

Q2 2014 Earnings Call

November 07, 2013 8:30 am ET

Executives

Nicholas Gutierrez

Charles W. Santoro - Executive Chairman

Herbert Ruetsch - Chief Executive Officer

Edward C. Arditte - Chief Financial Officer and Executive Vice President

Analysts

John Heinbockel - Guggenheim Securities, LLC, Research Division

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

Mark Wiltamuth - Jefferies LLC, Research Division

Mark R. Miller - William Blair & Company L.L.C., Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

Andrew P. Wolf - BB&T Capital Markets, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Fairway Market Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, the Manager of Investor Relations and Finance, Mr. Nico Gutierrez. Sir, you may now begin your conference.

Nicholas Gutierrez

Thank you. Good morning, ladies and gentlemen, and welcome to Fairway's second fiscal quarter earnings conference call. With me today are Charles Santoro, Fairway's Executive Chairman; Herb Ruetsch, our Chief Executive Officer; and Ed Arditte, our Chief Financial Officer.

By now, everyone should have had access to the second quarter earnings release, which went out early this morning. If you have not received the release, it is available on the Investor Relations portion of Fairway's website at www.fairwaymarket.com. This call is being webcast and a replay will be available on the company's website as well.

Before we begin, we would like to remind everybody that the prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. We refer all of you to the risk factors contained in Fairway's annual report on Form 10-K filed with the Securities and Exchange Commission on June 6. Fairway assumes no obligation to revise any forward-looking statements that may be made in today's release or call.

And with that, I would like to turn the call over to Charles Santoro, our Executive Chairman.

Charles W. Santoro

Thanks, Nico, and thanks to everyone on the phone for joining us today to review Fairway's continued operating progress and the financial results for the company's second fiscal quarter ended September 29, 2013. Now I did have the chance to see many of you at the recent opening of our Fairway Nanuet store. And that store has already proven to be successful beyond our initial forecast in terms of both revenues and foot traffic. And our margins are very much in line with those of a new suburban store.

So with that said, I'd like to start our call this morning with a brief update on Fairway's overall growth initiatives, comment more specifically on the company's financial results for the second quarter, and then highlight our 2 new store openings in Chelsea and Nanuet. Herb will then follow with a review of a number of operational initiatives and developments, and then Ed will finish with a financial summary and wrap-up.

So let me start by spending a few minutes to update you on a number of positive developments regarding our new store openings and our new store pipeline. As most of you know, we opened our Chelsea, Manhattan store on July 24 and we opened our suburban Nanuet store in Rockland County on October 10, with both stores turning profitable immediately. We have also continued to develop our new store pipeline with signed leases announced for new locations in TriBeCa, Manhattan; Hudson Yards, Manhattan; and Lake Grove, Long Island, all of which have been announced since August of this year. And earlier this week, we also signed a letter of intent for an additional very powerful New York City location, scheduled for calendar '15. And we hope we can announce a signed lease early next year on that site.

Including our 14 current store locations, our 3 recently signed leases and the letter of intent for the New York City location I just mentioned, Fairway has 18 store locations operating or scheduled to operate by the end of calendar 2015, with a variety of advanced lease negotiations underway. Said another way, we have never been in a better position from a real estate pipeline perspective, and we feel very good about our new store opening guidance for 2014 and 2015.

In another positive development, our new store construction costs have continued to improve and, in fact, have improved more rapidly than we had earlier guided, with Nanuet's construction costs coming in at $10 million to $11 million net of TIs. Our new store preopening expenses also continue to trend down with Nanuet preopening expenses estimated at $3.5 million to $4 million. And we believe that our Lake Grove, Long Island site, scheduled to open in late March or early April of 2014, will likely equal or improve upon Nanuet's new store construction and preopening costs.

Put another way, Lake Grove construction and preopening costs will probably be $15 million or less, including noncash portions of preopening expenses. This puts us solidly on course to reduce new store preopening expenses below $3 million per store within the next year or 2, and to reduce aggregate total new store construction and preopening expenses, including noncash items, to below $15 million per new store over that period. That compares to approximately $20 million of costs Fairway incurred in connection with the construction and preopening expenses of our first suburban store build-out in Paramus, New Jersey in early 2009. And of course, lower new store construction and preopening expenses will enable Fairway to further lever our new store construction dollars and enhance our already industry-leading return on invested capital for new Fairway locations.

Let me now review our financial highlights before I turn the call over to Herb and Ed for a more detailed discussion of Fairway's operations and financial results. Same-store sales in the quarter ending September 29 were approximately 1% positive, even after the effects of some modest sales trends that were associated with our Chelsea store opening in the second quarter and an unusually late start to the new school year as a result of a late Labor Day and the timing of Rosh Hashanah. The net result of these 2 calendar events was to extend our slower summer period by about a week. Even with these calendar shifts, our same-store sales in the second quarter remain positive and generally consistent with our previous guidance. Interestingly, Fairway same-store sales for the first 3 weeks of October were up more than 4.5%, even after the October 10 Nanuet store opening.

Now we reference this 3-week period because this period of October was entirely unaffected by Hurricane Sandy last year and the frenetic shopping that occurred in the 4 to 5 days immediately preceding Sandy, as well as the unprecedented restocking that occurred immediately following Sandy. And we estimate that the 5-week month of October, ending November 2, continues to show same-store sales growth of more than 1%, excluding Red Hook and after reflecting the full effect of Sandy, including, as I mentioned earlier, pre-Sandy stocking and post-Sandy stocking. So we do feel good about our sales momentum going into the third quarter. And we do expect, at this time, to have solidly positive same-store sales growth for the third quarter.

Fairway also increased its gross margins in the second quarter from 32.3% to 32.4%, or about 10 basis points. Our margin improvements were the result of continued improvement in shrink rates, enhanced vendor leverage and our rapidly growing private label presence. In fact, our private label penetration has increased 30 basis points from the same quarter last year. And Herb will discuss private label initiatives in more detail shortly.

Fairway also continues to make significant and steady investment into Central Services functions to help support the company's rapid growth. And we are very pleased with our progress in the build-out of our new production and distribution center in the Hunts Point section of the Bronx, where we remain on schedule and on budget for the year. Now current results show no benefits from this facility, although we do expect to see margin improvements beginning in the second half of next year, when this facility begins to ramp up into production.

Organizationally, we have made a number of important new hires, including this week's hiring of Dr. Shen, a Ph.D. who was most recently the Vice President of Technical Services, including R&D, quality and regulatory affairs, at Beech-Nut Nutrition. Dr. Shen brings important skills and expertise to Fairway with extensive experience working directly with the FDA and other regulatory and government bodies.

Our revenues continue to grow and, for the second quarter, increased some 14% over the previous year, benefiting from new store openings and same-store sales growth. In this case, new stores include Kips Bay, which is performing very well and was immediately profitable upon opening; and Chelsea, which is a smaller store that opened earlier this summer and has had less revenue impact. Now Chelsea is also profitable, but has contributed less to revenues and EBITDA than we had initially anticipated. Interestingly, Chelsea has among the highest foot traffic of all our Fairway stores despite being 30% smaller than our next smallest store in terms of retail square footage.

Our challenge at Chelsea has been to convert very high foot traffic into larger basket sizes, as it's been difficult for some new Fairway customers to navigate Chelsea's type format. So we have recently undertaken a variety of initiatives at Chelsea designed to accomplish this goal, including reconfiguration of our layout to improve traffic flow and an increased and enhanced focus on high-margin, grab-and-go perishables, to very good effect. And as a result of these initiatives, we have begun to see our basket sizes increase. So as always, we are terrific and dogged innovators and merchants and are rapidly evolving to meet new challenges head-on as we successfully develop this new quick-serve customer segment of our business in Chelsea and beyond.

We also currently expect our third quarter revenues will likely increase some 25% from last year's actual results and increase some 17% from last year's pro forma results, including lost sales at Brooklyn resulting from Sandy. In our guidance, we are mindful of important changes in this year's calendar including the very late Thanksgiving this year, which also marks the start of Hanukkah to the day. Our store contribution increased some 10% for the second quarter while our adjusted EBITDA for the quarter grew to $10.6 million from $10.1 million, after absorbing an estimated $1 million of additional public company expenses and added insurance expenses, parts of which resulted from the insurance fallout of Sandy. Incidentally, certain public company and Sandy-related insurance expense increases are meaningfully more than we had anticipated in the quarter and our full fiscal year.

The company's $10.6 million of EBITDA performance also reflects meaningfully increased other Central Service spending for the quarter versus last year, as we invest in Central Service initiatives and capabilities on a linear basis, more or less evenly dispersed between quarters, against our seasonally slower summer periods. Now as you all know, we are going into Fairway's 2 highest volume quarters and we do expect that Central Service spending as a percent of total revenues will improve meaningfully for the year. So we reaffirm our guidance that Central Service as a percent of revenue should fall for the year ending March 31, 2014, compared to 2013. And our current guidance for the third quarter adjusted EBITDA is 20% to 25% growth over last year.

Now on to Nanuet, one of our most successful suburban store openings. Well, what can we say? Nanuet has exceeded our expectations at almost all levels, from revenues and foot traffic to consumer reaction to our Fairway brand in an area where Fairway is not well-known. By way of background, Nanuet is a Simon Property mall redevelopment and Fairway is strategically positioned as an anchor tenant. Now I can tell you that Simon realty is also thrilled with Fairway's results. And of course, Nanuet is not included in second quarter results, but will be an important growth driver for revenue and profit in the third quarter. Separately and of note, we also continue to invest heavily in Fairway's processes and technologies. And, in fact, we believe the company will be awarded an important patent in connection with our operations that we hope to announce shortly.

We also continue to invest in our web, digital and social media reach and content. For example, our Facebook likes have tripled since July of this year. And we believe these forms of media are a highly efficient and effective way for Fairway to lever our media spend and further engage our customer base. Fairway has also just soft-launched a mobile app with Fairway WiFi now accessible in all Fairway stores. And we are launching today an updated website, which I hope you all have a chance to look at, with substantially enhanced content and capabilities. We also expect to expand additional app and website features through the spring of 2014, including healthy eating and a new e-commerce content, all of which have real relevance and impact with our customers.

So overall, we feel very good about our second quarter, our outlook for the third quarter, as well as the balance of this fiscal year. And again, we believe Fairway is very much on course with regard to all our major initiatives and growth plans, including our new store development and rollout, operating margin initiatives, private label development, media and IT initiatives and our new production and distribution facility. And of course, we are highly encouraged by the great success of our latest suburban store in Nanuet and our continued and improving ability to build and to open new stores for less capital that appeal to nearly all demographics, even in new geographic areas.

And with that, I'd like to turn the call over to Herb, who will provide more detail on key operating margin and merchandising initiatives.

Herbert Ruetsch

Thanks, Charles. Good morning, everyone. The first thing I'd like to talk about is our Chelsea store. This is a great store that's presented us with several merchandising and operational opportunities.

At 26,000 transactions per week and per-square-foot performance at about 90% of our Kips Bay store, we're in a very, very good position with this store and we're very happy with the outlook. It's all about more convenience. It's about more grab-and-go, more healthy alternatives. It's about doubling our frozen food opportunity inside the store and way more beer.

This is a customer base that we're really focused on cultivating. It's the 20-somethings and the 30-somethings. It's heavy, heavy daytime traffic in that area of the city, so we responded to it in our typical innovative way and we are seeing results already in the per-basket statistics. Now just for a little perspective. The way that per-basket statistic works in this operation is $1 in an average basket equals about 1,000 customers, roughly. So if we get $1 in the basket, it's a big home run for us, and we see our way moving forward on that very quickly.

We've also worked through the center store. Charles mentioned the reorganization of the aisles and creating some space to get through the stores and some remerchandising. The philosophy inside a small store like this is the best item wins the day. So we have several departments, as you know, in our center store. We're broader and deeper than anyone in the industry. When you're operating in a smaller format, you do focus on what the best item is. A great example is baby food. Earth's Best is the best baby food. It's an organic baby food. It's what that customer base wants. And that's what's stocked in the store.

Operationally, it's about the productive use of a labor force in a smaller footprint. So we can actually combine, for instance, meat and seafood management positions inside the store to gain labor efficiencies. And we also are focused on really getting to a real-time inventory order replenishment philosophy inside the stores, especially because we've noticed that this store is very intense towards the lunchtime crowd, towards the supper crowd. And then on the weekends, we have more of the larger baskets. So when you're dealing with that type of customer that's looking for sandwiches, looking for hot and cold bar, those are the types of folks you've got to be very much on your toes, very much responsive to the time that they're coming into the store. And that's what we're focused on, and we're yielding great results with it right now.

As I've said, this is all about the innovation of Fairway. This is really -- I've been here over 15 years. This is really just one more step in the process. We'll talk a little bit later about bringing our production center to the centralized location in the Bronx. These are all the types of things that happen in a growing company. We're very excited about it and we see great prospects as we go forward. So all our work here will be extraordinarily impactful to the bottom line. We expect on a run rate basis to see very, very strong performance in our Chelsea store. And the merchandising initiatives that we've driven inside the store, we take those learnings and we spread them through other stores.

If you've been into our Paramus store, you'll notice a much more grab-and-go type of selection. There's a Mediterranean bar there. There's more grains, more cold selection, more hot bar selection, better visual profiles in the store and less service that the customer really doesn't want, doesn't appreciate. I'll give you a great example. A customer does not need a clerk to scoop out a pound of potato salad for them. They're very capable of doing it themselves. And they'd rather not wait 4 or 5 minutes on a line to get that type of food. So in our stores, you'll see side cases near our rotisserie chickens, where folks can just take that pound of potato salad or coleslaw and take it with their chicken and don't have to wait on a deli line. So that's a lot of what's going on in the industry. We're responding to it in a very aggressive way. The customer's really looking -- really are looking for a convenient shopping opportunity.

So let me touch base on Nanuet for 1 second. We're about 20% north of our original projections on the revenue line, and we expect that to travel right through the bottom line. So this has been an extraordinarily strong opening for us. As we're up in the store, we did see some of our customers from Paramus, some of them from Harlem. We haven't seen large impacts in our sales transfer, very minor. But we saw a lot of new customers and we saw some great baskets up there. So we're thrilled about opening, those numbers are holding very nicely, and that's settled in at above our projected rate.

I'd like to talk a little bit about private label now. I'd like to touch base on this because it's a large opportunity for the company. We talked about this a lot on our roadshow, the IPO and during our conferences in the summer. And we talked about a number a little bit of north of 7% as we were on the roadshow. Our run rate on private label penetration is now approaching 8%. That's pretty strong performance in a 6- to 7-month period since the roadshow, and we're very happy with that. You may see in our stores a hazelnut spread, which is comparable to Nutella in the market. You'll see Fairway coffee OneCups in the market, comparable to Keurig. And I'll tell you, if you try one of our -- if you try any one of these products against the competitor, the manufacturer competitor, I believe you will agree with me that they are far superior. We really have launched a couple of great products there.

I think we mentioned in the last call that we also launched an antibiotic-, hormone-free chicken during the second quarter. And these have been extraordinary results, great performance in the item itself and minimal cannibalization inside the department. So we've seen the entire department lift significantly, the category of chicken lift significantly. And this is what our private label is all about. We talked a lot about that. We don't go to the kind of cheap alternative, as many have in this business. We go to the top of the categories, to the top quality, and we drive against the best that's available in a manufacturer environment. And we really hit virtually every time. I think the number is about 75% of our private label brands performs at the very top of the category.

15% is the margin benefit. And with lower cannibalization than kind of the cheapie program that I talked about, you get a lift, you get more margin. At the end of the day, more margin dollars drives the bottom line. So it's been a very successful program. And just a quick update. In January, we will launch our first real shot into conventionals, Fairway Everyday [ph]. It will include items like mayonnaise and ketchup and things like that, and you'll see this show up in our conventional aisles in January. It's about 100 items. Conservatively, we anticipate about a $5 million sales implication, annualized. And we believe, again, we'll have minimal cannibalization with that. So we'll have stronger gross profits in these categories and these departments as we roll it out.

Finally, I'd like to touch on our production center. This is all about quality, it's about consistency, it's about leverage and it's about control. We're very excited to have an extraordinarily strong team on hand here working with us, Dr. Shen being our latest addition. And our produce cross-dock is scheduled to roll out in the fourth quarter of this year. So this is something that is really transformational to the company. This is taking the company from a distribution -- or a production standpoint, where we're doing this in 14 stores today. And you can imagine how difficult it is to supervise something like that and how difficult it is to get leverage over an environment like that. And you do have inconsistency and quality gaps between stores.

Bringing all this in, so the best quality, the best recipe consistently executed, is just going to be a very, very powerful thing for us. We see margin benefit from the obvious math of having production cycles and reducing overall labor expended and some of the buying opportunities that we have. We don't count the retail impact in our benefits. So we think that will be significant, but we don't count that in our models. That's additional.

Charles also touched on the ad strategy. We've made a very focused effort to go from things like paper and distribution, which is a flyer in the vernacular, and radio type of broadcasting, which is very indirect, reducing investment in that, using it where it makes sense and where it's targeted and where it really works, and moving towards a more direct approach, which is also much less expensive, of using social media, using electronic newsletters. Our folks send out newsletters under several categories, general, health, organic, things like that. And I get all these things, and they're fantastic. The development work that our team has done in-house, this is really all done in house, has been extraordinary, and we match up. The thing that is most interesting to me -- Charles mentioned we tripled our likes on Facebook. Our likes on Facebook match up with Whole Foods, who has -- in the New York area, who has a long, strong presence in social media. So we're making extraordinarily quick progress here and we're very excited about it. And it's a lot more productive than using paper, radio and some of the traditional forms of media.

Charles W. Santoro

And I would also point out, our Facebook engagement is multiples of what our competition is. [indiscernible] more store base.

Herbert Ruetsch

It's a great comment. With that, I'd like to turn the call over to Ed Arditte, who'll go through the financials highlights, and then we'll be back for questions.

Edward C. Arditte

Thanks, Herb, and thanks to all of you for listening in today. Let's start at the top of the P&L. Net sales grew 14% in the quarter to $183 million. And you've heard this from us before, 94% of this growth came from new stores and the balance came from our same-store sales growth.

Our same-store sales, inclusive of our wine and spirit locations, increased 1% quarter-over-quarter despite the impact of unfavorable calendar shifts, which we estimate may have impacted same-store sales by approximately 100 basis points. The increase was primarily driven by an increase in basket sizes of 1.6%, partially offset by a decrease in customer accounts of 0.6%. But perhaps most importantly, our customer visits increased 17% year-over-year.

We continue to make progress on the gross profit line, which clearly is one of our major objectives. And we increased our margin by 10 basis points year-over-year. But this is driven by a 70-basis-point improvement in our merchandise margin, partially offset by higher rent expense, in part due to taking more space at a location. The margin expansion was driven by continued work with our vendor base and improved private label penetration, which increased, as you've heard, 30 basis points over the prior year.

Now as Charles mentioned, over the next 2 to 3 years, we expect to drive approximately 100 basis points of gross margin expansion through continued vendor leverage, private label growth and the ramp-up of our central production facility. We believe that the primary drivers of our gross margin growth over the next year will come from the work with our vendors and increased private label penetration. We would expect to begin seeing the benefits of the production facility flow through the P&L, as you've heard, in the second half of our next fiscal year, with significant upside in subsequent years as we accelerate our activity in this center and significantly grow our store base.

On the expense line, Central Services, which is a component of general and administrative expense that directly relates to the operations of our business, remained flat as a percentage of sales on a year-over-year basis. And as Charles mentioned in his remarks, we feel good about our ability to expand our EBITDA margin by leveraging this expense on an annual basis. Now during the quarter, our adjusted EBITDA grew 5% to $10.6 million, primarily as a result of the increased contribution from the new stores. Earnings growth was adversely affected by lower-than-expected sales and margins at the Chelsea location and an increase in public company and insurance costs.

We have continued to reduce total new store investment spend. And we're encouraged to see the preopening costs down nearly $1.3 million or 30% on a year-over-year basis. Of the $3.9 million in preopening costs, approximately $600,000 of that was noncash as a result of deferred rent. The preopening costs of our newest store in Nanuet, which opened early in the third quarter, will end up around $4 million, which again is significantly lower than our historical per-store average of nearly $5.5 million. As we mentioned, new store opening cost discipline is a big area of focus for us. And we expect to continue to drive the per-store preopening expense down as we move forward.

Now turning to other elements of the P&L. Interest expense for the quarter declined approximately $800,000 to $5 million, primarily due to a lower borrowing rate from our debt, which resulted from the May repricing of our senior credit facility. Approximately $1.3 million of our interest expense was noncash. On the tax line, we recorded an income tax provision of just under $1 million in the second quarter compared to a benefit of $5.9 million in the prior year second quarter. As we've discussed with you before, the tax provision is a noncash charge, and we expect to be shielded from cash taxes for some time to come due to an excess of $100 million of tax net operating losses. For the full year, we expect the income tax provision to be approximately $3.5 million.

Turning to the balance sheet. We have approximately $77 million of liquidity, inclusive of nearly $60 million in cash and cash equivalents, and just under $20 million of revolver availability. Importantly, we are very comfortable with our capital position and our prospects for cash flow generation over the next few years. During the quarter, we spent approximately $17.5 million on capital expenditures, and approximately $15 million of this was for the completion of Chelsea and the build-out of Nanuet, $1.2 million relates to the early work in the production center, and the balance was for merchandising initiatives and equipment upgrades and enhancements at existing stores, as Herb alluded to.

Now before I turn it back over to Charles and we open up the line for questions, let me conclude with our thoughts for the quarter ending December 29, 2013. As Charles mentioned in his remarks, we're expecting revenue growth of 25% on a reported basis. However, we think the right way to appropriately analyze the third quarter is to add approximately $12.5 million to last year's reported sales to adjust for the lost sales at our Red Hook, Brooklyn location, which was temporary closed due to Hurricane Sandy. The reason this adjustment is important is because last year's results include the $2.5 million of EBITDA contribution from the Red Hook location, which was covered by insurance.

So this sales adjustment is appropriate to get you to an apples-to-apples basis. And with this sales adjustment, we're expecting pro forma revenue growth of approximately 17%. From an adjusted EBITDA perspective, the third quarter is typically our strongest quarter of the year due to the holiday season. We're currently estimating, as Charles mentioned, our adjusted EBITDA to grow in the 20% to 25% range over last year's reported results of $12.4 million.

Now with that, let me turn it back over to Charles for some concluding remarks before we get to the Q&A.

Charles W. Santoro

Thank you, Ed, and thank you, Herb. Well, as you've heard today, we are really proud of what we've achieved since the company's IPO, including our most recent quarter. In the 6.5 months since Fairway went public, we have successfully opened 2 new store locations, including our newest and highly successful suburban store in Nanuet. We have signed 3 leases and entered into 1 letter of intent for a new store location in 2014 and 2015, and a very active backlog of late-stage lease negotiations underway.

We have refinanced our debt and reduced borrowing costs by 175 basis points on a cash basis. And we have grown our revenues and increased gross margins and store contributions, all while absorbing significant incremental public company and insurance expenses. We have also invested heavily in our Fairway brand and private label initiatives with great success.

Finally, our production and distribution center build-out is on schedule and on budget for this year. So to say that all of us at Fairway have been busy would be a real understatement. And we continue to work hard to capitalize on these initiatives and others as we enter our 2 most important quarters, the third quarter and the fourth quarter, and position the company strongly for fiscal 2015.

So thank you all for participating in today's call. And let's now open the call to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of John Heinbockel from Guggenheim.

John Heinbockel - Guggenheim Securities, LLC, Research Division

So guys, a couple of things. On Nanuet, how broad-based is that 20% outperformance? Meaning, when you look at by department, look at it by day, how broad-based is that? Or is it skewing to weekends? Is it skewing to fresh? And then because you're taking so much volume out of the market, have you seen a more vigorous competitive response than you thought you were going to see? And what might that response be?

Herbert Ruetsch

John, it's Herb. We will see pricing responses out there. But as you know, we've mentioned the store during the opening. We're pretty aggressive in our openings on a pricing front. We get a lot of support from the vendor community to do that. So we expect that in any opening. So that's really what it's going to be. This is not Whole Foods or Trader Joe's territory. This is ShopRite and Stop & Shop territory. So that's what you're going to see. And as you know from our history, that is a short-lived phenomenon that goes away. The performance of the store is a fairly typical, strong suburban performance. So weekday sales are strong, but the weekends are stronger. So it's a pretty typical type of performance. The café, interestingly, in that store, that store being a component of a larger mall complex, is extraordinarily busy. That's the one thing that kind of jumps out for me. It's been a very, very powerful experience there. It's really being used as a food court for the mall. And we should mention that this mall is not fully opened yet. There's still development happening in this project. And we expect that to just be further upside for us. So we're just thrilled about how this has started out.

Charles W. Santoro

And let me just say, John, it's already become a destination. And so the fact that we're a destination and we were the anchor tenant for a new destination development has traded the benefit of our shopping hours, probably extending later into the evening on weekdays than we would typically see. We've also found that we have been widely embraced within the entire county. Interestingly, we have not had any meaningful impact, if any impact, on Paramus. So the customers that we're getting into that store are virtually almost all new to the Fairway system. And they really are embracing what we're doing. And it's obviously extremely encouraging for us in the context of our broader growth plans.

John Heinbockel - Guggenheim Securities, LLC, Research Division

And second thing, you guys have talked about investments right in Central Services. So a little color, what might you be investing in an IT, for example, or non-IT? What are the 1 or 2 things that might be -- you're spending a little more money on than you might have thought?

Herbert Ruetsch

Listen, we enhanced our FP&A process. Being a public company, we really needed to sharpen up there and be very, very tight with how we look at the business and how we project it. We've invested in our marketing process. When you go from -- think about our strategy. When you go from all kind of outsourced-type of production, which is radio and newspapers and flyers and things like that, and start to go into the direction of social media, there's a lot of content creation. And we've got a bunch of folks in here that are working on stuff like that. Overall, our costs come down dramatically, but you staff up. So some of those costs that had shown up in the stores before as advertising expense, we'll migrate a portion back into Central Services and support that marketing redirection. We also enhanced our real estate. As you know, this story is about picking good real estate. And we hired a fellow from Bed Bath & Beyond, who's degree is in store site selection. Believe it or not, there's a degree like that out there. This guy has really been a great addition to the team. He's enhancing our real estate search process. So those are the types of places, we're investing in our strategic objectives. That's what we're doing.

Charles W. Santoro

And so John, I would just say that, as Herb mentioned, we really are continuing to always front-load our investment in Central Services to make sure the company is positioned for its rapid growth. And we have not missed the mark yet. Well, as people who go to our store openings can attest to, our newest store openings are always our best stores. So that includes big investments, as Herb mentioned, into quality control. It involves big investments into a bench of new-generation managers ready for the next store to open. And we have a really strong bench ready for next year. It obviously involves the inevitable investment in FP&A and other public company expenses. We always like to be properly and fully insured, so as to take risk out of our business. That paid off big time last year in the context of Sandy. So insurance always remains a significant item for us and we try hard to manage it well. And I hope that gives you a sense for the kinds of things we're doing. We don't slow our pace of Central Services investment down just because we're in a quiet quarter. We do it on a level basis and we do it opportunistically as we think is right for the business in the long run.

Operator

Our next question comes from the line of Brian Nagel from Oppenheimer.

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

So my question has to do with sales growth. And not to sound nitpicky here at all, but the guidance was for about 15% sales growth and you guys did 14.1%. And in your prepared remarks, you talked a lot about the kind of the puts and takes there. So the question I have is should we just think about the modest underperformance relative to your guidance primarily as a result of the holidays within Q2? Or is there something else at play? And then a follow-up to that, we talked a lot about the strength of the new openings. Are there any stores that are maybe performing not as well as you think at this point?

Charles W. Santoro

Let me take a first crack at that and turn it over to Ed. The interesting thing about the quarter is that the sales shortfall in Chelsea would more than explain any small variances you are talking about. The issue of the calendar would further compound it, but the reality is we fully absorb that. And I think you know in my opening remarks that we are heavily focused on Chelsea, which is a great real estate location with tremendous foot traffic. And we're actively cultivating the quick-serve market and we're addressing that type format to maximize the ability of our customers in that tight space to achieve those sorts of goals and objectives. Now what was the other question you had?

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

Well, the question I had, if you look -- and I think you may have just answered it. So if there's a store that's maybe not performing as well as you want it to, and I guess, what you're saying is Chelsea. I was asking if there are any others within your...

Charles W. Santoro

Well, let me just say that we are always -- we are focused on our stores intensely everyday. Even our best stores represent additional opportunity for us. And Herb touched on some of the things we're doing now to broaden our appeal and to give our customers the ability to do more of their shopping in our store, particularly when it comes to convenience-oriented shopping impulses. So I can't single out any store that we're particularly focused on. We're focused on all of them. Our stores, as you know, in aggregate, are doing very well. All of our stores are profitable, including Chelsea. So we feel we're in a really good position right now.

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

So on the Chelsea store and recognizing that this is a tweaking process, it will take some time, but when do you think -- or how long do you think it will take before we see maybe a meaningful improvement to try to convert some of that traffic to better sales?

Charles W. Santoro

I would like to defer that answer, meaning that what I don't want to do is to give false guidance. We try to be very, very transparent with our research community and also with our investors. What we can tell you is the initiatives we've put in place are having tangible and real impact on average basket size. I would tell you that, in all the guidance we've just given you, we have factored in a realistic approach as to the likely ramp-up of Chelsea beyond where it is now. But I don't want you to walk away thinking that Chelsea is not working. Chelsea is, in some ways, working too well. And we simply have to go ahead and refine our format in that tight space to accomplish our goals, and more importantly, to accomplish the shopping objectives of our customers.

Operator

Our next question comes from the line of Mark Wiltamuth from Jefferies.

Mark Wiltamuth - Jefferies LLC, Research Division

Wanted to ask a little more about the Central Services and when we can look forward to leveraging that. So you're up 13% here in this quarter. And I think longer term, you've been talking about getting down to kind of 7% to 8% normalized growth for Central Services. So when can we get back to that kind arc on growth and start to see some good leverage on the G&A line?

Edward C. Arditte

Hey, Mark, this is Ed. The way I would answer that, and we tried to address that in our remarks, is the right way to think about Central Services leverage is on a full year basis. Clearly, as we move into the second half of our fiscal year here with Q3 being a big revenue quarter, Q4 not as big as Q3 but still very solid, we expect to see good Central Services leverage in the second half of the year. And as Charles said in his remarks, we are reaffirming our strong belief that we will leverage Central Services this year. And we talked during the roadshow and during the IPO about 100 basis points of Central Services leverage over a 3-year period of time. I think when we have finished this year, we will have made a very good down payment on that 100 basis points, if you will. And so think about it annually as opposed to quarterly, and think in terms of steady annual progress this year and the subsequent 2 years.

Mark Wiltamuth - Jefferies LLC, Research Division

Okay, great. That's good color. Also I wanted to ask a little bit about what you're seeing in the macro environment in the New York markets or just in general, how you feel the customer is doing right now.

Charles W. Santoro

Let me just start by -- I'm going to ask Herb to comment. But let me just start by saying we are finding that our customers are more engaged with us than ever before, probably because we've given them the venues to do that by embracing social media and other forms of interaction with our customers. When Herb talked about our Facebook likes tripling since July, we touched on -- maybe we didn't spend enough time on the fact that we have by a factor of 5x or 10x, a higher component, within those already very large numbers, of customer interaction in those likes than the competition that we were able to publicly monitor. And this information is available publicly. We'd be happy, by the way, to give it to you after this phone call. So at the same time, it's also giving us a window into new and evolving trends and desires within our customer base. And so we go back to some of the things that Herb did talk about, which is focus on convenience, focus on certain types of perishables that people really want and to use our production and distribution facility to help us capitalize on that.

Herbert Ruetsch

So I'll just reemphasize that. In the macro environment, we see customers moving into better food choices. It's why we believe we're so well positioned for this movement from the conventional type of market into the better food choices that we offer, as well as our competitors, in organics and specialty. So that continues. We see our business continue to build, our ratio of business in the organics and the fresh and the perishable side of the business. So that customer just continues to grow. It's a great place to be. Convenience is a big, big thing. So maybe it's been underplayed in the industry for too long, but customers just do not -- so really think about the deli. The only thing you really need to do is slice the meat for them because you don't want them operating your slicers. Everything else, they can pick up and take with them. So you'll see in our environment more and more movement to that type of solution for the customer. And in our Paramus, I'll call it our lab, we're really seeing a tremendous response to the movement we made. And we'll be doing, what I'll call, very minor renovations. It's not a big expense for us. It's taking a wall down and adding in a couple of bars, including soups and things like that. Customers, they really desire this. They don't want to wait on lines. They want to move through the store and they want to get everything that they need for their home. And we just see ourselves positioned really, really well. We offer the conventionals. We're broadening the offering on the grab-and-go and the convenience. So I think that's what I would say we see out there. The environment itself, we're working through our signage concepts and how they connect to the customer. This new app that is in soft launch right now enables us to talk directly to the customers. So when they engage and take that offer, you know what they did. You basically know that they are organics customers. They like a nice piece of meat. And you can market to them directly. So there's technique involved here, improved technique. And there's also improved offering, lower profiles. If you go to our markets, you're going to see our produce stands, lowering profiles, better visibility for the store, because the store is a powerful experience. The more visibility and less kind of visual impairment inside your environment, the better it's going to be. So you'll see a lot of pretty cool stuff over the next -- our Lake Grove store will be kind of putting us pretty close to where our design is, but it will continue to evolve from there.

Mark Wiltamuth - Jefferies LLC, Research Division

On balance, are you seeing a trade up to higher price points with some of these better food choices and more convenience? Or are you seeing more trade down to value?

Herbert Ruetsch

No, it's trade up. These are great, great profit items. The items that you see in hot bars and cold bars, these are the highest profit items in the store. And that's what we're seeing. They're trading into that and they're completing their shop. So there's more volume in a side being purchased, right, because you've made it easier to get to the customer. And we're going to continue to offer more out of our deli service into a self-service type of concept. So there's more of what exists. But in the expansion of things like hot bars and cold bars, you really do get a higher profit penetration, as well as our private label. Our private label rollout, on average, we have a 15% benefit in gross profit with private label. And our team has done great job rolling out great items there.

Charles W. Santoro

And let me just say, we really are a differentiated destination food source in the New York metro area. We are the go-to-place for food. And that has become more and more and more powerful for us as time has gone on. And so of course, there are many, many, many competitive events in every one of the markets that we operate, and too many to talk about. And frankly, too many for us to focus on, other than to simply be aware. What we have done very well is we have been true to the Fairway experience, which is a combination of an incredible selection of the best foods, fresh, natural, organic, at best pricing in that category, huge range of conventional at best pricing, meat or beef pricing, typically on an everyday basis, in that category. It's differentiated. It's generally unique to us in many areas. We're now finding that people are embracing our private label, not as a commodity but as a true comp to national brands. And so all of these things have kind of come together to create some very, very powerful momentum for us, and you see it. You see it in our same-store sales and you see it in the context of us driving same-store sales growth, even as we are opening multiple sites in the same geographic area. That was always our objective and we're really pleased we can do it. And we're pleased we can do it in the combination of less capital spend in each of these new sites. Hope that answers your question.

Operator

Our next question comes from the line of Mark Miller from William Blair.

Mark R. Miller - William Blair & Company L.L.C., Research Division

Could you give us some perspective on how your stores that have come into the comp base, the stores you opened last year, what kind of sales growth they're seeing and, I guess, what kind of impact that has overall in the company's aggregate comp?

Herbert Ruetsch

It's strong, Mark. As they move into that environment, I'll tell you, when you came out of the honeymoon period -- and I think we've extended that to 2 months because our honeymoon period really is 2 months, so we same-store compare now at 14 months. We do see strong upper single-digit to low double-digit kind of growth in the stores coming out of that suburban environment. So that does have a very positive impact on our same-store sales. It's different in each location and there's different things happenings in markets. And there's some sales transfer that happens, depending on where we are. But in general, we're consistent with that message that we ramp up very quickly. We don't -- our suburban store showed more growth in our second and third years. Our city stores showed less because they ramp up so quickly. So we're still consistent with that type of performance.

Charles W. Santoro

But I would add, in particular, Kips Bay is still ramping. Chelsea, we've discussed, is in a long process of ramping, but it's ramping month-to-month. 86th Street is still ramping. Stamford is still ramping. Westbury is ramping. Our stores that have been opened in the timeframe you were describing continue to have really strong momentum. So we're really encouraged by that. Some of those stores are in the same-store sales comps and other stores, like Kips Bay, won't be until sometime next year.

Mark R. Miller - William Blair & Company L.L.C., Research Division

Great. And then are you able to, you think, accurately measure the level of sale transfer right now? What do you think that is tracking at?

Edward C. Arditte

Mark, it's a hard one to know. Some of it is anecdotal. We see customers from one location, our people know them so well. We see them at another location. I think we have seen less sales transfer in our last few openings. Is there a little bit there? There has to be, but nothing that is truly measurable in any meaningful kind of way. I think as we look forward, to the extent we do open up a new location that is really, really close to one of our existing locations, and that's more likely in the Manhattan environment, we'll try to give you a little bit more color and a little bit more thought on that. But I think, overall, sales transfer is a lesser issue for us today than it might have been a couple of years ago.

Charles W. Santoro

And look, again, I'd just go back, we are monitoring Paramus. Paramus, we cannot find any real evidence of sales transfer between Paramus and Nanuet, even though they are quite close. So that is a really, really positive indicator. We are monitoring Kips Bay. And we are still growing Kips Bay, even as we opened in July our location in Chelsea. So what you're seeing is a lot of new customers are coming into our base and not many are leaving.

Mark R. Miller - William Blair & Company L.L.C., Research Division

Right. That sounds positive. And then just a final question for me. It sounds like Nanuet is off to a great start. Is the upside you're seeing there fully offsetting the lower sales than expected at Chelsea? And then it'd be helpful if you could just sort of bridge the change in your thinking from -- where in the December quarter, I think it was expected to be closer to 20% growth. And so what are the key factors bringing it closer to 17%? Because it sounds like comps will be similar.

Edward C. Arditte

Mark, I think that if you take a look at our 17% growth and what that translates into, yes, I think it is almost spot on to the nearest $100,000, if you will, where the street average was for the third quarter. So I think our number, whether you use the 25% reported or the 17% adjusted, which that 17% adjusted, as I said, is I think the right way to look at it, gets right to the street number. Are there some puts and takes? There always are going to be puts and takes when you have 14 stores, but they balance out really quite well.

Charles W. Santoro

Now I would say though, Mark, that in our current thinking, and I'm doing this off the top of my head but I think the math is correct, I wouldn't be surprised if the slower ramp-up of Chelsea accounts for 1% of growth, meaning that if we're at 17%, it would've been an 18% plus. I think that, that's certainly where we are. Now I'm going to, again, reemphasize this because we'll come back and visit it. Chelsea is a great location with 25,000 or 26,000 people a week going through and buying something. Chelsea is going to become, like all of our stores, a business that drives traditional, city-like 4-wall EBITDA. It's already profitable and driving a good return on invested capital. What we're trying to do is give you some sense that we believe that ramp-up period, being driven principally by us reformatting the store to address the specific demand in that location, which is a convenience location, is something that we are actively and aggressively focused on. We've had some good results. We then intend to take that learning curve and use it in our other locations to good effect. And don't forget what we've always planned on taking advantage of, the incredible location that Hudson Yards will become in the context of being a destination and tourist draw. And also TriBeCa, which will be at the base of the new World Trade Center and all the other buildings that are now going through development. So this is a great process for us. We're making great progress in these kinds of insights. You'll see it in the numbers. But I think it does account for some reduction in the guidance we're giving you at the top line over the next couple of quarters. The run rate will eventually be the same run rate, or perhaps even stronger, as a result of the kinds of things we're doing. That's our current thinking, Mark.

Operator

The next question comes from the line of Edward Kelly from Crédit Suisse.

Edward J. Kelly - Crédit Suisse AG, Research Division

Just to start on the new store opening schedule and pipeline. It looks like between Lake Grove and TriBeCa, you have, I guess, sort of like Q1 and maybe Q3 of fiscal '15 lined up. Are you still expecting another store opening in '15? I don't know if that would -- at fiscal '15, I don't know if that would be Hudson Yards. It looks like that might be early '16.

Charles W. Santoro

Yes. Let me try and give you our current thinking. We do fully expect to open 3 stores in the next fiscal year. We would include Lake Grove as one of those. We would include TriBeCa as another. And we are currently working on another location that we think is extremely promising. We also do expect to open at least 4 stores in the following year. Hudson Yards would be one of those. And the letter of intent I referenced in New York City area would be another one. And that letter of intent should go to lease sometime in early January, we would guess, at this point. So we feel very much on track. We have a lot of intense conversations underway. We are very particular, as you know, about the sites we select and about the terms that we require within our leases. And that's always served us well and we continue to do that.

Edward J. Kelly - Crédit Suisse AG, Research Division

So the mix of urban, suburban, in terms of what you've announced so far, looks good. Any change beyond that in terms of the pipeline and how you're thinking about things?

Charles W. Santoro

Well, again, let me say that -- it's a good observation. We won't dwell on it. But I think it is fairly clear that the types of sites that we're announcing are, in our world, outsized sites, by way of opportunity. So the sites that we have announced are certainly well beyond, we think, in most cases, an average Fairway site. Our strategy hasn't changed though. We are very much focused on New Jersey, Connecticut and New York, both in terms of the immediate metro area and the surrounding important suburban markets. And you'll see more of that as the next year or 2 unfold.

Edward J. Kelly - Crédit Suisse AG, Research Division

Okay. And just kind of a related question, I guess. Every store, I guess, at this point is probably still a little bit of a learning experience. I'm just curious as to how your mindset around locations and what you're looking for is evolving, especially related to the fact that Nanuet seems to be doing really well, right? But also maybe how the smaller urban store sort of fits in with Chelsea. So any color there?

Charles W. Santoro

Look, I'd just give you a little bit of color. One starting point is the fact that our total spend for construction and preopening is coming down as rapidly as it is, obviously, if anything, opens up the areas where we can drive a solid return on capital in surrounding suburban locations. Our site selection manager and our own internal process for evaluating real estate has become more and more scientific. We are focused on some very, very specific things, which we don't need to discuss right this moment, other than to summarize by saying we really like, in suburban markets, to be part of a draw, where we contribute to that draw. If you take a look at Nanuet, it was symbiotic, it was very synergistic. Simon looked to us as a really important anchor to draw people into the redevelopment of a mall in Rockland County, a location of about 300,000 people. And we look to that project to be a basis of some incremental foot traffic that was captive there, including thousands of workers and people who shop over the weekend. And as was mentioned earlier, that mall is only half-opened. The movie theater hasn't opened. The huge gym hasn't opened. And there are 20 retail locations that haven't opened. We love those kinds of things. Those are the kinds of things that we're focused on in the context of the suburban sites we hope to discuss in the coming months and in the coming years.

Edward J. Kelly - Crédit Suisse AG, Research Division

Okay, great. And then just a last question for you on the comparable store sales. How much do you think Sandy will end up hurting you in Q3?

Charles W. Santoro

Well, we'll let you know shortly. But right now, I would summarize by saying the following. Because all of our stores opened the day after the storm, except for Brooklyn, what we saw last year as a business was a very, very, very powerful runup to the storm comparable to a Christmas period, literally. Our store at 74th Street achieved its highest single-day volume the day before the storm hit, highest single-day volume in the history of the company at any location. And in the period after the storm, there was extensive restocking, particularly in areas that were affected by power outages. And that was a lot of the areas in which we operate. We also found that because no one else was open, we benefited from those people that would come to our store that might not normally come to our store. Many of them traveled great distances because they all needed food. So I would say on balance, if you really think through Sandy in the context of us, Sandy was probably net-net a positive last year. It probably was a positive. And that's the way we see it. The fact that we had 1.5% positive same-store sales growth for the first 3 weeks of October clean [ph], and that's allowing for the opening of Nanuet, we think is a pretty powerful statement of the underlying health of our business. And we're now guiding you towards thinking in terms of positive same-store sales comp for the quarter, even after giving effect for all this. And I did touch on this a little bit earlier. I hope I'm giving you some additional color on this. But ultimately, we would think that Sandy did help us last year.

Operator

Our last question comes from the line of Andrew Wolf from BB&T Capital.

Andrew P. Wolf - BB&T Capital Markets, Research Division

A couple of follow-ups. First, I think Mark Wiltamuth's question, and I think you kind of answered it. But most of the retailers I follow kind of had a tough October. And a lot of them, each week got worse, and we're all kind of trying to figure out what's going to happen in November. But it doesn't sound like that's the case for you. And if you want to keep it brief and just affirm that, that's fine. But it doesn't sound like you saw any effect on your business from the government shutdown or anything else.

Charles W. Santoro

No. And as I said, even giving -- again the first 3 weeks of October, we're up 4.5%. So that's quite -- that's extremely strong. And even giving effect to all the distortion caused by Sandy, which last year was a net-net positive, we closed the month out, based on preliminary results, at same-store sales numbers that were in excess of 1%. And we feel very good about that. We certainly continue to see good momentum in our business. And we are guiding towards positive same-store sales comps for the quarter, even after giving effect to 2 recent store openings.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Got you. And another follow-up on real estate. And in the context of Nanuet doing well above budget and, again, your last answer shed some light on it. But some of the things that could matter on how store does, I mean, they're so many, but some of the big ones that come to mind are: a, where you went, the site selection; b, the competition, in New Jersey, you talked about ShopRite, in particular, not wanting to cede share and that takes a while to iron itself out; and then brand awareness. I mean, as you look at Nanuet, I mean, what is the big factor? Is it real estate? Or is it the competition's a little lighter there? Or what are the factors, I should say, if you want to shed some light on it?

Charles W. Santoro

Look, I'll just start -- for the sake of time, let me start by saying Rockland County is not a huge population demographic, 300,000 people for an area that's quite spread out. The number one thing that helps all of our stores is that people want to go there. They become destinations and people will travel from more than just the surrounding community. And you certainly see that in Nanuet. It has been helped by the fact that it is also part of what is now a new destination, which is the redevelopment of that particular mall. And those are the kinds of demographics we seek in suburban locations. We love to be a destination ourselves with good population and good income within a reasonable radius. And we really like it when we have, in addition to that, some other draw, i.e. in this particular case, the redevelopment of a very, very attractive new shopping precinct in Rockland County. So those are the kinds of things we're looking for. Those are the kinds of things we think are driving our success. None of it would work if people came into our store and didn't like what they saw, and none of it would work if we were dependent upon just the local population of that small town. But that isn't our business model. Our business model is to be all things to all people when it comes to food.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Okay. And do you think there's enough real estate developments of the type you're seeking? And just specifically thinking of the suburbs, in the metro region, for you to hit the goals of 30 stores?

Charles W. Santoro

Yes. Most certainly. There are many equivalents of Nanuet in the New York metro area of some 21 million people. We are actively pursuing and negotiating a number of them. And I think you'll agree with us when we do announce them that they meet the same criteria.

Edward C. Arditte

Ladies and gentlemen, thanks for joining us for today's conference call to review our results. We look forward to following up with any of you that have questions. And obviously, our next conference call would be scheduled for early February, when we report to you on our third quarter results. Thanks again for joining us.

Charles W. Santoro

Thanks, everyone.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.

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