By Steven Ralston, CFA
iFresh Inc. (IFMK) is a specialty Chinese/Asian grocery chain that owns and operates nine retail supermarkets, located primarily in the Greater New York City (five stores) and Greater Boston (two stores) areas, along with two stores in Florida (one in Sunrise and the other in Orlando). An additional four stores are slated to open during 2018. Furthermore, the company manages another six stores through management contracts another one scheduled to open in 2018. In addition, iFresh owns and operates two wholesale businesses (Strong America Limited and New York Mart Group, Inc.).
iFresh manages six stores that are owned by others in exchange for a management fee. In mid-November 2017, the company announced several new management agreements. In November, iFresh entered into management agreements to manage iFresh Harwin in Houston, TX. With iFresh having entered into management contracts to manage stores in Texas and California (iFresh El Monte), it indicates even larger expansion potential, especially since there are also several metropolitan areas in the Mid-West and on the West Coast with highly concentrated Asian populations.
Growth is being driven by the acquisition and development of new store locations, and enhanced by its online sales initiative, including WeChat (a widely-used, multi-purpose, Chinese social media mobile app). Also, iFresh recently began accepting Alipay, a familiar method of payment for Chinese with accounts denominated in Chinese Yuan. Using an online/mobile app, customers are able to pay for items using Alipay’s Mobile Wallet. The company’s online shopping and delivery service currently covers the Greater New York Area, including the surrounding suburban Chinese populations in New Jersey and Connecticut. The online sales channel has significant potential for growth as it accelerates the company’s ability to extend geographic coverage without the capital costs required to open new stores.
The company is vertically-integrated with a well-developed supply and distribution network comprised of its two wholesale businesses. Supply agreements (sometimes exclusive) and strong relationships with farms help ensure a reliable supply of quality, specialty Chinese vegetables, fruits, seafood and live aquatic food offerings. iFresh, through its Strong America wholesale business, imports over 2,000 items, primarily from mainland China, Thailand and Taiwan, which together comprise 95% of the company’s total imports. Through its New York Mart Group wholesale business, iFresh has developed strong relationships with certain orchards and farms that produce Chinese specialty fruits & vegetables, and hence benefits from reliable sources of supply for domestically grown Chinese specialty fruits and vegetables. In addition, the company has an exclusive seafood agreement with Sunray Venus, LLC, which operates aquafarms (one hatchery and two nursery bivalve facilities, a freshwater fish farm, a lobster facility and a shrimp farm) in Florida. Also, iFresh has developed a distinctive in-house cold-chain logistics system, which is capable of collecting, transporting and delivering fruits, vegetables, live seafood, live aquatic products and frozen goods to more than 20 states in the Eastern U.S. Furthermore, the company exports live lobsters to China.
The primary driver of the company’s sales and gross profit growth is expected to be the acquisition and opening of new stores under the iFresh banner. Currently, management is targeting metropolitan locations with large, concentrated Asian populations on the East Coast. Management’s Growth Through Acquisition strategy is supported by certain competitive strengths of iFresh:
- A deep understanding of the taste and payment preferences of the Chinese population in the United States, and specifically opening stores in areas of dense populations of this targeted group
- A logistics system that can efficiently deliver fresh perishables and unique imported items along the I-95 corridor on the East Coast (and potentially along the I-5 corridor on the West Coast)
- A supply system that provides a smooth stream of fresh perishables (seafood, fruit and vegetables), not only traditional items like shrimp, lobsters and fish, but also items specifically catering to Chinese preferences, such as live shrimp, live fish, live king crab, live crystal (aka snow) crabs, Geoduck clams, live razor clams, live snails, along with specialty Chinese fruit and vegetables.
The management of iFresh has a deep cultural understanding of the unique consumption habits of its target consumers: Asian Americans, primarily Chinese Americans. The distinctive eating habits of this consumer group are not satisfied with the current offerings by mainstream supermarket chains in the U.S. National and regional supermarket chains have multiple, convenient store locations but offer only a limited selection of Chinese and Asian specialty foods.
Asian Americans prefer to buy fresh and shop often for culturally unique fresh produce, seafood and other groceries. Through its logistical sourcing system and delivery network, iFresh has the ability to obtain and distribute assortments of the distinctive seafood, meats, fruits and vegetables preferred by this niche market. iFresh’s primary competitors tend to be unsophisticated single-store retailer stores, usually operated as privately-owned family businesses. With its highly developed supply chain, iFresh offers a more diverse product selection sourced from the U.S., Southeast Asia, Japan and Korea.
The recent news of a LOI to acquire 75% of Fujian Fuding Seagull Fishing Food Co. (a seafood farming, fishing and distribution company), which would enhance iFresh’s supply chain capabilities while at the same time tilt the company’s sales mix towards food distribution. Seafood distributors trade at higher multiples than food retailers.
iFresh is in the emerging growth phase of its corporate history. The company is still in the early stages of establishing its grocery store footprint and supply chain network. In addition, the company has already embraced digital retailing with social media sales drivers (WeChat), e-commerce ordering with delivery options and mobile payment capabilities (Alipay) that specifically cater to its target consumer group. The full potential and financial impact of management’s strategy has yet to be observed financially.
Due the character of the company’s enterprise, namely a small-capitalization company in the specialty food retail/distribution business with an expected growing sales profile, we expect iFresh to attain a second quartile P/S ratio versus the comparable companies listed above. On projected TTM sales (as the four new company-owned stores open during 2018), our share price target is $16.00, which is predicated on attaining a P/S multiple of 1.56.
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By Steven Ralston, CFA