Fairway Group Holdings Corp.

Jared Ziment, Max Lipscomb

January 11, 2015

2

Table of Contents

I. Sourcing & Investment Thesis

II. Company Overview

III. Valuation

IV. Conclusion

V. Appendix

I. Sourcing & Investment Thesis

4

Early History of Fairway Market

Source: Company Presentation and Filings

HISTORICAL OVERVIEW

1933

1990

2007

2013

Nathan Glickberg opens a small market in Manhattan’s Upper West Side neighborhood. For much of it’s history, Fairway operates as a single, family-owned market.

Nathan’s grandson Howie expands the original location and builds a new store in Harlem.

Westport, CT based private equity firm Sterling Investment Partners purchased a majority stake in the business, valuing it at $150mm. Fairway had opened 3 stores.

Fairway IPO’s at $13 per share, raising $177mm at a total valuation of around $400mm. Fairway had opened 12 stores.

5

Headlines Galore

Sources: New York Times, Dealbook, Wall Street Journal, Bloomberg

6

All Was Going Well …

Source: Bloomberg

$15

$20

$25

$30

Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13

IMMEDIATE PRICE PERFORMANCE FOLLOWING IPO

High: $28.31

$25.46

7

… Until

Source: Bloomberg

$0

$10

$20

$30

Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15

PRICE DECLINE SINCE OCT. ‘13

Jan. 9$3.47

Earnings Miss

Earnings Miss

Earnings Miss

8

So What Happened?

Private equity-fueled management became increasingly aggressive with growth plans. At the time of the IPO in April, 2013, fairway told investors it expected to expand at a rate of “3 to 4 stores per year.”

1

To meet growth expectations, management invested in an industrial scale distribution center and focused on store openings. Costs began to spiral out of control and bottom line suffered despite strong top-line growth.

2

With a cost structure designed for a 30 store operation and only 14 stores opened, consistent earnings misses and downward guidance revisions destroyed positive investor sentiment.

3

The stock currently trades in the $2-4 range (~0.2x sales), indicating that investors are seriously concerned about the possibility of bankruptcy and/or further dilution.

4

We believe overly negative investor sentiment has exaggerated the possibility of bankruptcy and ignored FWM’s $50MM in liquidity along with the possibility of a

secondary equity raise. This presents us with an investment opportunity at below the security’s intrinsic value.

9

Fairway Group Holdings Corp. (NASDAQ:FWM)As of January 9, 2015

Recommendation: Buy Current Price: $3.47 2 Yr. Price Target: $6.67

Fairway Market has proven its ability to successfully deliver a unique product met by strong consumer demand.

Mismanagement and overly ambitious expansion plans have nearly derailed the company, but a newly installed veteran

management team create an undervalued turnaround opportunity.

Newly appointed CEO Jack Murphy has experience building two nearly identical businesses

Fairway’s product is proven to be differentiated and desirable; fixing cost structure and store

management issues will lead to bottom-line increases and multiple expansion

Immediate price catalyst – Jack Murphy is presenting at the ICR Xchange Conference on Jan. 13th;

presentation is likely to cover new plans for growth and expansion

CATALYSTS

RISKS

High probability of a secondary equity raise in the next year

Bankruptcy is a legitimate possibility for this company in the event of a liquidity crunch; FCF has

been negative for 7 of the past 8 quarters

Fairway’s market and industry are both highly competitive

II. Company Overview

11

Unique Position within the Evolving Grocer Industry

Source: S-1 Filing

Specialty / Fresh / Convenience

Natural / Organic

Conventional Grocery

Fairway Market is a grocer based in New York City, NY which provides a highly differentiated one-stop shopping

experience “Like No Other Market.”

12

Differentiated Product Offering in a Growing Market Segment

1. Nutrition Business Journal, USDA

2. IRI, Morgan Stanley Research

$695 $716 $738 $760 $783 $806 $830 $855 $881

$51 $54 $59 $64 $69 $76 $83 $91 $100

$0

$200

$400

$600

$800

$1,000

2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Total Food at Home Natural / Organic

8.4% 8.7%

10.5%11.8% 12.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2010 2011 2012 2013 2014E

FOOD INDUSTRY SALES (1)

Y/Y GROWTH IN ORGANIC PACKAGED FOOD SALES (2)

13

Stable Top-line Growth Follows Leading Capacity Utilization

Source: Company Filings, I-Club Research, Morgan Stanley Research

5 5

7

9

12

14

0

200

400

600

800

1,000

1,200

1,400

1,600

0

2

4

6

8

10

12

14

16

2009 2010 2011 2012 2013 2014

Store Count Sales Per Square Foot Peer Sales Per Square Foot

Top Line Performance Summary (FY ‘09 – FY‘14)

Operating Metrics Summary(FY ‘09 – FY‘14)

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

2009 2010 2011 2012 2013 2014

Revenue Gross Margin SSS

14

Cost Structure Issues Arise From Inexperienced Management Team

Source: Company Filings, I-Club Research, Morgan Stanley Research

Margin Analysis Summary (FY‘11 – 1H‘15)

22.62%

25.07%

8.24%

9.14%

6.03%

3.43%

13.80%

0%

5%

10%

15%

20%

25%

30%

Direct Store Expenses G&A Expenses

Adj. EBITDA Margin Average Peer EBITDA Margin

($12,352.9)

($35,000)

($30,000)

($25,000)

($20,000)

($15,000)

($10,000)

($5,000)

0

$5,000

$10,000

Quartely Free Cash Flow($ Millions, CFO - Capex)

Free Cash Flow Average FCF Burn

Jack Murphy – Chief Executive Officer (CEO)

30+ years of experience in retail businesses

Started Fresh Fields, a grocer in the DC area; grew from 0 to 25 stores before selling to

Whole Foods

Managing partner tasked with investment in 24 Hour Fitness; helped grow company from

30 to 400+ locations

Most recently CEO of Earth Fare, a North Carolina grocer; grew from 10 to 30 stores and

sold business to Oak Hill Capital

Dorothy Carlow – Chief Merchandising Officer (CMO)

Media and Community Relations manager at The Fresh Market (2005-2007)

Worked at Earth Fare under Murphy (2009-2014)

Was promoted four times, eventually becoming the Chief Merchandising Officer

Responsible for Earth Fare’s same store sales growth, new store openings,

profitability, cost controls, shrink management, and rebranding for 32 locations

across 9 states

15

Newly Installed Veteran Management Team

Source: Company Website, Earnings Transcripts, LinkedIn

“We are very pleased by the growth and financial performance of Earth Fare, which has more than quadrupled run-rate EBITDA since we acquired the company in 2006. This has translated into a very successful investment for our firm.”

Charlie Yoon, Partner at Monitor Clipper(1)

III. Valuation

17

Comparable Universe

Source: Bloomberg, Company Filings, Morgan Stanley Research

3.7x

13.8x

15.2x

0

5

10

15

20

25

30

CQ2 2013 CQ3 2013 CQ4 2013 CQ1 2014 CQ2 2014 CQ3 2014

FWM Peer Group Average Russell 2000

EV/LTM EBITDA EV/ LTM Sales EV/LTM FCF Stores SSS Growth (%)Sales per Square

Foot (FY '14)

Sprouts Farmers Market (SFM) 19.46x 1.66x 78.16x 191 9 608

The Fresh Market (TFM) 12.23x 0.98x 42.29x 164 3.3 515

Whole Foods (WFM) 9.84x 0.91x 34.11x 399 3.1 985

Mean 13.84x 1.18x 51.52x 251 5.13 702.67

Fairway Markets (FWM) 3.73x 0.20x -7.11x 15 -3.9 996

EV / LTM EBITDA

18

Notes on Valuation

When looking into Fairway Market’s valuation, we made the following observations:

1. This is an extremely risk-laden investment with high leverage, implying that we should seek

LBO-like returns to compensate

2. The investment is characterized by several years of expected negative free cash flows

3. There is a high possibility for a secondary equity issuance to raise additional capital and

ensure maintenance of loan covenants

Leading us to conclude…

The Venture Capital Method of valuation is an appropriate measure for this stock’s intrinsic value. It

allows us to account for the necessity of high returns, short-term unprofitability, and likely equity

dilution.

Basic concept is to assume future sale of the company, discount the expected proceeds, and assume a

certain amount of dilution.

19

Venture Capital Valuation Method

Source: Venture Capital & Private Equity: A Casebook, by Josh Lerner, Felda Hardymon, and Ann Leamon

Terminal Year Discounting

Required Rate of Return: 20%

Years to Sale of Investment: 6.25

2014 EBITDA 48,797

Terminal Estimated EBITDA 195,188

EBITDA Multiple 8.5x

Terminal Firm Value 1,659,098

Discount Factor 32.0%

Present Firm Value 530,871

Required Ownership Percentage

Current Shares Outstanding (MM) 29.3

IPO Shares 13.6

New Shares Issued 6.8

Price Per Share $3.00

Amt. Raised 20.4

Total Shares 36.1

Retained Ownership % 81.2%

Dilution Factor: 18.8%

Required Ownership Percentage: 84.1%

Intrinsic Firm Present Value 446,724

Net Debt 216,614

Intrinsic Mkt Cap - With Dilution 230,110

Intrinsic Mkt Cap - No Dilution 314,257

Mkt Cap as of 1/7/2015 153,400

VALUATION ASSUMPTIONS

1. Assume required 20%+ required IRR

2. Sale of company in 6.25 yrs

3. Jack Murphy is able to replicate his success at Earth

Fare, quadrupling run-rate EBITDA in 6 years (not

unreasonable given inefficient cost structure and

previous poor management)

4. Company is sold at 8.5x EBITDA, the low-end of the

peer range

5. Equity is raised to address near-term liquidity issues –

6.8mm shares issued at $3.00 per share; current

shareholders retain ~80% ownership

RESULTS

We are easily able to hit our 20% IRR breakeven point with

these relatively conservative assumptions. Even with

significant equity dilution, the investment is a homerun in

the event of a successful turnaround.

20

Price Target and Sensitivity AnalysisAs of January 9, 2015

With Dilution

EBITDA Multiple

230,110 8 9 10 11 12

Term

inal

EB

ITD

A($

00

0's

)

100,000 ($1,208) $25,717 $52,643 $79,569 $106,494

125,000 $52,643 $86,300 $119,957 $153,614 $187,272

150,000 $106,494 $146,883 $187,272 $227,660 $268,049

175,000 $160,346 $207,466 $254,586 $301,706 $348,826

200,000 $214,197 $268,049 $321,900 $375,752 $429,603

No Dilution

EBITDA Multiple

314,257 8 9 10 11 12

Term

inal

EB

ITD

A($

00

0's

)

100,000 $39,367 $71,364 $103,362 $135,359 $167,357

125,000 $103,362 $143,359 $183,356 $223,353 $263,350

150,000 $167,357 $215,353 $263,350 $311,346 $359,343

175,000 $231,352 $287,348 $343,344 $399,340 $455,335

200,000 $295,347 $359,343 $423,338 $487,333 $551,328

SENSITIVITY ANALYSIS

PRICE TARGET

80% Venture Capital Method

(20% IRR over 2 years)

= $5.00

20% Comparables

(8.0x EBITDA Multiple)

= $13.37

+ =Price Target:

$6.67 / share

Compared against

1/9/2015 $153mm MCAP for breakeven

IV. Conclusion

22

Closing Thoughts

After significant research into Fairway Group Holdings Corp (NASDAQ:FWM), we believe that Fairway is currently

plagued by a series of very fixable problems

The firm’s stable top-line revenue, differentiated product, and incoming senior management present an overall

investment picture better than the apparent market consensus

Given a willingness to maintain a long-term investment horizon, we believe this investment provides a favorable risk-

adjusted return

Primary Risks:

Risk of bankruptcy, while exaggerated, is a legitimate possibility for Fairway

At current burn rate, management has roughly 1 year of runway remaining ($50mm in liquidity, average of

$12mm burned per quarter)

If current short-term funding is exhausted we find a secondary issuance to be likely in the $20-30mm range

We believe Murphy will be able to reduce the burn rate substantially given current operational inefficiencies

Taken together, these facts imply a high likelihood of refinancing capability for FWM’s 2018 loan maturity of

$250mm

Fairway operates in a highly competitive industry

To further this concern, New York’s metropolitan area is one of the most saturated in the world for high-

end/luxury grocers

That said, Fairway has proven its ability to compete for customer dollars in NYC and the surrounding area

POST-DILIGENCE OPINION

V. Appendix

24

Financial Model

Source: I-Club Estimates, Company Filings

Fiscal Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

($ in thousands) FY FY FY FY FY FY FY FY FY FY FY FY FY

Net Sales $343,106.0 $401,167.0 $485,712.0 $554,858.0 $661,244.0 $775,986.0 $873,837.7 $1,033,360.9 $1,219,365.9 $1,438,851.7 $1,697,845.1 $2,003,457.2 $2,364,079.5

COGS $230,912.0 $271,599.0 $326,207.0 $368,728.0 $445,379.0 524,659.0 $591,763.7 682,018.2 804,781.5 949,642.1 1,120,577.7 1,322,281.7 1,560,292.4

Gross profit 112,194.0 129,568.0 159,505.0 186,130.0 215,865.0 251,327.0 282,073.9 351,342.7 414,584.4 489,209.6 577,267.3 681,175.4 803,787.0

Operating Expenses 102,435.0 124,465.0 159,911.0 189,465.0 233,960.0 285,337.0 282,975.1 308,512.9 350,567.7 410,072.7 479,641.2 563,973.2 656,032.0

Operating Income (EBIT) 9,759.0 5,103.0 (406.0) (3,335.0) (18,095.0) (34,010.0) (901.2) 42,829.8 64,016.7 79,136.8 97,626.1 117,202.2 147,755.0

D&A 7,175.0 10,233.0 14,588.0 19,202.0 22,093.0 27,056.0 31,174.3 38,234.4 24,387.3 28,777.0 33,956.9 40,069.1 47,281.6

Non Reoccurring Items 4,851.0 8,538.0 15,127.0 19,908.0 43,366.0 55,751.0 – – – – – – –

Adjusted EBITDA 21,785.0 23,874.0 29,309.0 35,775.0 47,364.0 48,797.0 49,182.5 81,064.2 88,404.0 107,913.9 131,583.0 157,271.4 195,036.6

25

Financial Model – Key Assumptions

Source: I-Club Estimates, Company Filings

Fiscal Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

y/y sales growth NA 16.92% 21.07% 14.24% 19.17% 17.35% 12.61% 18.26% 18.00% 18.00% 18.00% 18.00% 18.00%

y/y Adj. EBITDA growth NA 9.59% 22.77% 22.06% 32.39% 3.03% 0.79% 64.82% 9.05% 22.07% 21.93% 19.52% 24.01%

Gross Margin 32.70% 32.30% 32.84% 33.55% 32.65% 32.39% 34.00% 34.00% 34.00% 34.00% 34.00% 34.00% 34.00%

Operating Margin 2.84% 1.27% -0.08% -0.60% -2.74% -4.38% -0.10% 4.14% 5.25% 5.50% 5.75% 5.85% 6.25%

Adjusted EBITDA Margin 6.35% 5.95% 6.03% 6.45% 7.16% 6.29% 5.63% 7.84% 7.25% 7.50% 7.75% 7.85% 8.25%

D&A / Sales 2.09% 2.55% 3.00% 3.46% 3.34% 3.49% 3.57% 3.70% 2.00% 2.00% 2.00% 2.00% 2.00%

COGS/ Sales 67.30% 67.70% 67.16% 66.45% 67.35% 67.61% 66.00% 66.00% 66.00% 66.00% 66.00% 66.00% 66.00%

Operating Expenses / Sales 29.86% 31.03% 32.92% 34.15% 35.38% 36.77% 32.38% 29.00% 28.75% 28.50% 28.25% 28.15% 27.75%