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Why Fairway Group Holdings Shares Went Bad

By Jeremy Bowman - Feb 7, 2014 at 3:01PM

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What: Shares of Fairway Group Holdings (NASDAQ: FWM) were looking rotten today, falling as much as 29% after an underwhelming third-quarter earnings report and a management shakeup.

So what: The upscale supermarket chain said sales increased 22.9% to $205.7 million, growth that was primarily driven by new store openings and the reopening of the Red Hook, Brooklyn, location that was damaged by Hurricane Sandy last year. Same-store sales fell 1.7% year-over-year in the quarter, a foreboding sign for what's supposed to be a growth stock, though the company credited that to tailwinds in its Q3 2013, including pre-Sandy stock-up and competitors being unable to open following the storm. Despite the growth in revenue, adjusted EBITDA only improved from $12.4 million to $12.8 million. Net loss in the quarter narrowed from $44.5 million to $31.3 million. After adjustments, the company reported a loss of $2.2 million, or $0.05 a share.

Now what: Separately, Fairway also said that CEO Herb Ruetsch would retire after 15 years with the company, though he will remain on as a special adviser. Fairway President William Sanford will step in as the interim chief. Fairway also promoted a new COO and CFO in the process. Several research firms downgraded the company in the wake of the poor earnings report and management shift, with Credit Suisse saying, "We have become particularly concerned about the consistency of the earnings shortfalls, the disappointing store opening in Chelsea, reduced visibility in the real estate pipeline, increased competitive pressure, and the management changes." Given those charges, the company clearly has some work to do before getting back into investors' good graces less than a year after its IPO.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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