Fairway Group Likely To Beat On Bottom Line EPS – Strong Acquisition Candidate

Written by Scott Matusow.

Fairway Group Holdings Corp. (NASDAQ:FWM) earning's report is scheduled for May 28th, 2015, but no 8K has yet been filed to confirm this date. We will assume the company will report on this date as it normally does not file an 8k to officially announce earnings, but rather stays on a set schedule. We feel the upcoming earnings report will beat on the bottom line mainly because the company imports a lot of its food from Europe.

Fairway Group Holdings owns and operates food retailers throughout The United States. The company provides fresh produce, fruits and vegetables along with natural and organic foods which include cheeses, meats and chicken products, and a whole raft of other various foods. Basically, Fairway competes with the likes of WholeFoods (NASDAQ:WFM), The Kroger Co. (NYSE:KR), Trader Joe's, and Aldi to name but a few.

With the EURO weakening substantially due to the quantitative easing (QE) engaged by the European Central Bank (ECB), and with the dollar subsequently gaining strength during Fairway's Q4, we believe Fairway's costs will be lower than analyst expectations, thus showing a better bottom line earnings-per-share (EPS) than analysts expect. We note that the average analyst bottom line earnings expectations did not factor in the weaker EURO and stronger Dollar, so what they are likely missing is the fact that Fairway enjoyed more buying power with the dollar than in past quarters, which we believe should equate to a decent beat in the (EPS).

In September of 2014, the company named Jack Murphy as its new Chief Executive Officer (CEO) Mr. Murphy was a co-founder of natural foods grocer Fresh Fields, Inc. before it was sold to Whole Foods, Inc., and most recently he served as Chief Executive Officer of Earth Fare, Inc., an organics and natural food chain with locations in the Southeast and Midwest.

Jack Murphy has come out of retirement to run Fairway. At 66, it's reasonable to state that he does not 'need' the job. Murphy feels that with a correct ad campaign, reorganizing products in stores so it's easier for shoppers to find what they are looking for (cutting down in and out time equates to higher customer turn-over), that Fairway in time will become profitable.

We remarked in an article earlier this year;

One of our sources contacted us about this company after hearing some buzz that Whole Foods may be interested in acquiring the company. Murphy has a strong history as a turnaround CEO that cleans up, leans down, and then sells companies. Fairway has 14 stores in the New York City area, but Whole Foods has only three. For Whole Foods to go out and actually lease and/or buy property to gain a presence in such a large market would not be cost effective.

Fairway's current market cap is around $170M, so for a modest and fair premium, Whole Foods can acquire Fairway's outlets to gain a presence in the huge NYC market for a cost much more company-friendly than the alternatives. Considering Murphy's relations with Whole Foods and the obvious synergy here, we feel strongly that the rumors we are hearing will turn out to be true, and Whole Foods will acquire Fairway sometime this year for around $300M.

The Kroger Co. is also rumored to have interest in acquiring Fairway. Kroger is the parent company of stores such as City Market, Dillons, Food 4 Less, Fred Meyer, Fry’s, Harris Teeter, Jay C, King Soopers, QFC, Ralphs, and Smith’s.

Fairway seems like a better fit for Kroger than it would be for Whole Foods. However, Whole Foods has been lagging behind lately in the New York City Area, and most of Fairway's stores are located there.

Additionally, with Fairway's $400M in losses over the years, this could be used in a proper merger as a tax benefit for an acquiring company, especially a giant like Kroger. Kroger is not unlike Valeant (NYSE:VRX) in the sense that it has a lot of child companies under its banner. We feel an acquisition of Fairway by Kroger makes perfect sense, and this is the suitor we are hearing is likely to acquire Fairway.

Conclusion:

Fairway has a long ways to go on its own to become a profitable company again. As per Murphy's own guidance, the company will not be profitable to at least 2018. However, Murphy has a strong history as not only a CEO who turns around companies, but after turning them around, he sells them.

However, we do believe based on the reasons mentioned in this article, that Fairway will beat on its bottom line EPS this quarter. We feel this will show a strong sign that Murphy is succeeding slowly in turning the company around which should further restore investor confidence and cause some decent stock appreciation.

Additionally, Fairway has strong name recognition in the New York City area, a strong and long storied history, and is household branded. We expect both Whole Foods and especially Kroger to make a play for Fairway long before the company is profitable again.

Obviously the greater risk here is that these and other companies would have no interest in buying Fairway, and continued losses which could possible cause Fairway to engage in less-than-favorable financing.

We would remark that Solta, a company we predicted would be acquired in 2013 (which it was) was in even greater trouble, and that one fetched a 50% premium in its sale to Valeant.

Fairway has its stores perfectly located for a Whole Foods or Kroger to go in and make profitable in a much shorter time frame, not withstanding enjoying a potential $400M write-off due to losses racked up by Fairway over time. Again, this is not unlike Solta's assets being taken up by Valeant.

Our sources when it comes to M&A activity are usually right on, and they tell us that Fairway is indeed in play -- we shall see!