Is This the Next Whole Foods Market?

You can be forgiven if you've never heard of Fairway Group Holdings (NASDAQ: FWM  ) . The company is responsible for Fairway Market, a small chain of high-end grocery stores currently in and around the greater New York City metropolitan area.

Back to the beginning
Fairway dates back to the 1930s, when it started out as a small local market, and today it still maintains its small footprint with only 12 stores in what's estimated to be a $30 billion food retail market in the greater New York City metropolitan area; however management has some big growth plans in mind. This probably helps explain its recent IPO in April of this year. And since then, the stock has been on a tear, rising 58% and counting.

Is opportunity knocking?
While Fairway is tiny today, management sees the Northeast market (from New England to the District of Columbia) ultimately supporting up to 90 stores along with an additional 300 nationwide. So is it reasonable to believe that the market can support 400 or so Fairway stores? Possibly. Let's take a look at some other well-known names to see how they stack up:

Company

Number of stores

Whole Foods (NASDAQ: WFM  )

349 

The Fresh Market (NASDAQ: TFM  )

131 

Trader Joe's

398 

Harris Teeter (UNKNOWN: HTSI.DL  )

212 


Not so fast, Lone Star
It's worth noting a few things though that could give investors pause. Sterling Investment Partners owns more than 47% of Fairway shares, and thanks to a dual-class share structure, Sterling holds 76.5% of the voting power, which means that they are calling the shots and investors today are along for the ride. A lockup period that expires in October will free up more shares, which could arguably play out either way on the stock price.

Speaking of price, the stock has had a nice run since the IPO in April and today trades at around two times sales of $661 million, which resulted in a net loss of $62 million in fiscal year 2013. For context, Whole Foods trades at around 1.7 times and Kroger's (NYSE: KR  ) recent deal to buy Harris Teeter for $2.5 billion implies a price-to-sales ratio of about 0.5. So it's plain to see that while there is an interesting potential growth story here with Fairway, the market is certainly privy to that potential and pricing it accordingly. Like our good man Warren Buffett is known to say: "You pay a very high price in the stock market for a cheery consensus."

The Foolish bottom line
For the most part we Fools watch IPOs from a distance to give the company some time to adjust to life in the public markets. I certainly see no reason to stray from that philosophy here with Fairway, either. But with that said, there is an interesting story developing here that may have some legs to run. Higher-end grocers are witnessing a growing market, and while Fairway still has a lot to prove, it's definitely a company worth keeping an eye on.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

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  • Report this Comment On July 17, 2013, at 10:46 PM, PharmTeam wrote:

    Thanks Jason. Living in NYC I love Fairway (the store), and have been hoping to see them succeed financially (so that I might invest/they don't disappear from my block). How do you think their new centralized distribution center will help margins going forward? It should be operational soon. Would you consider that in your valuation?

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