Fairway Group Holdings (FWM), the New York-based firm behind the popular northeastern Fairway Markets, is approaching the end of the 180 day lockup period following its April 22 IPO. Significant stakes in the company held by private equity firms, executives, and directors will be unlocked October 14, and the resulting increase in supply may drive down the stock's price, at least temporarily, and may provide aggressive investors with an interesting short opportunity.
The 12,117,540 shares of Class A common stock and 15,470,720 shares of Class B common stock held by FWM shareholders that predated the IPO will be unlocked for sale on October 14. The huge majority of these shares are controlled by Sterling Investment Partners, LP, which holds 9,045,578 shares of Class A common stock, approximately 33% of all outstanding stock, which translates to a total voting power of 76.5% and essentially grants Sterling control over the company. Like most private equity firms, Sterling is under pressure to generate capital in the aftermath of the Great Recession, and since it can sell some of its stake and still maintain a controlling interest in the firm, it seems very likely to unload some of its shares once the lockup period has expired from the outright selling of the stock or through a secondary offering.
FWM executives and directors will also have their shares unlocked on October 14; many may choose to sell in the interest of diversifying their portfolios or for estate planning purposes, further driving down the price of FWM.
FWM is a high-end grocery store in the vein of Whole Foods (WFM), Fresh Market (TFM) or Trader Joe's based in New York. It was established as a single store in Manhattan in the 1930s, and has since grown into a major New York chain (though expansion to a second store didn't occur until 1995). The company currently owns thirteen locations in New York, New Jersey, and Connecticut, with a fourteenth store soon to open in Nanguet, New York. FWM attempts to maintain a price point close to typical grocery stores while offering a shopping experience comparable to upper-tier stores in an effort to attract a broad demographic.
FWM's price has likely been artificially inflated by its strong name recognition and loyal customer base in the northeastern United States; as a high-end foods retailer, its customer base is more likely than most to be active and supportive in the stock market. FWM has shown substantial increases in sales over the past few years, from net sales of $401.2 million in fiscal 2010 to $554.9 million in fiscal 2012. However, these increases have not led to profitability. FWM posted net losses of $7.1 million, $18.6 million, and $11.9 million in fiscal 2010, fiscal 2011 and fiscal 2012, respectively. Notably, FWM reported that net loss jumped sharply to $56.2 million in the 39 weeks ended December 31, 2012.
Regardless of its slogan ("Like No Other Market"), FWM faces enormous competition that offer essentially identical customer experiences - high end grocery markets that offer selections of local and organic products, prepared foods, and gourmet items are a dime a dozen urban and suburban communities in the United States. Several of these competitors are much better capitalized national brands, with significantly greater resources and marketing power. Major competitors include Whole Foods Market , Trader Joe's, Shoprite, Sprouts (SFM), and The Fresh Market . FWM clearly wants to pursue an aggressive growth strategy, given the number of locations opened in the past decade, but it isn't clear that there's much space for profitable expansion in an already-saturated national market.
Sterling Investment Partners' control of the company is a source of concern for potential investors. Sterling is a large private equity firm with over $1.5 billion of equity capital under management, and it will undoubtedly utilize its stock sales to whatever end best suits its financial interests, which may or may not correlate with FWM other shareholders.
Additional disclosure: This article was written for informational reasons and partly based on the company's S-1. Investors should study the S-1 and discuss any investment ideas with their financial adviser before making any investment decisions.