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

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.

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 Smiths.

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.

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Disclosure: Long FWM.

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