Value Line has initiated coverage of Fairway Group Holding (FWM) in its flagship product, The Value Line Investment Survey. Now one of the country’s highest grossing food retailers per square foot, the company can be traced back to its humble beginnings as a fruit and vegetable stand in the Upper West Side of Manhattan, New York City. Fairway is among the most recognizable food store brands in the New York metropolitan area, and claims to be “Like No Other Market,” due to its focus on a one-stop shopping experience for any specific diet or needs. As of the last yearly report date, it employed nearly 5,000 workers (including approximately 1,100 full-time staff).
Although the company has existed since the 1930s, its current business plan is relatively young. In 2007, Sterling Investment Partners, a Connecticut-based private equity firm, bought a controlling stake in the company (80.1%). Soon after, it invested over $100 million for Fairway’s expansion, both within and outside of New York City. Paced to nearly double its store count in a four-year time span (from eight in 2011 to a projected 16 by 2015), Fairway plans to expand further in the coming years, largely by fortifying its market share in the New York Metro Area. The company held its initial public offering on the New York Stock Exchange in April of 2013.
Fairway has risen to prominence in recent years due to several factors. First, it offers something of a distinctive shopping experience in New York City. Its industry leading store format productivity, coupled with the high volume of customer traffic to its various store locations, lends itself to a higher growth outlook than many of its competitors. Its ability to market specific dietary and gourmet trends has also proven beneficial. The prominent focus on fresh produce and healthier foods, while also offering a substantial array of regular foodstuffs, appeals to a wide base of potential customers. Fairway stores currently offers gluten free, kosher, and vegan sections (among other niche categories) in most of its locations. It boasts unmatched brand equity in the most densely populated portion of the country.
The company’s largest risk exists in its competition. Though the aforementioned awareness for healthier eating is supported by Fairway’s offerings, industry behemoth Whole Foods (WFM) has superior nationwide brand equity. Thus, any future growth into new markets outside of the Tri-State Area would be met with staunch competition from this cash-rich adversary. Regional chains that possess similar local strongholds would also pose a serious threat to Fairway as it expands into outside New York, Connecticut, and New Jersey.
On top of the success of new stores, Fairway relies on increasing same-store sales to support operations. We believe the near-term growth of the top line is promising. Quickly approaching $1 billion in annual sales, the company faces plenty of challenges as it tries to sustain growth. Operating earnings have improved on a yearly basis over this period, which should encourage investors. Still, the grocery has yet to post a full-year profit as a publicly traded company. It bears importance that the supermarket chain’s business model and store aesthetic is firmly rooted in a specific region, so market conditions, discretionary spending patterns, and customer tastes will likely vary elsewhere. Its effectiveness to gain market share in new areas, in addition to expanding its current slate, is at the crux of Fairway’s long-term success.
All told, investors interested in this growing grocery store chain operator are advised to consult Value Line’s quarterly reports for Fairway Group Holdings, as well as any supplemental reports and relevant articles as important news items arise.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.