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DESPITE SKEPTICS, LYNCH SEES POTENTIAL IN WINN-DIXIE

JACKSONVILLE, Fla. -- Can Peter Lynch, Albertsons' former president and chief operating officer and Winn-Dixie Stores' newly appointed president and chief executive officer, work magic at the beleaguered chain here?Lynch told SN he intends to defy skeptics who maintain Winn-Dixie is beyond the point that its survival can be ensured."A lot of people are betting it can't be done, but I'm going to prove

JACKSONVILLE, Fla. -- Can Peter Lynch, Albertsons' former president and chief operating officer and Winn-Dixie Stores' newly appointed president and chief executive officer, work magic at the beleaguered chain here?

Lynch told SN he intends to defy skeptics who maintain Winn-Dixie is beyond the point that its survival can be ensured.

"A lot of people are betting it can't be done, but I'm going to prove it can be," Lynch told SN. "A lot of people have given up on this company. But if we can get our people energized, make the right decisions on merchandising, and execute properly, we can get this ship to sail again."

Lynch spoke with SN a few hours after assuming his new responsibilities here. He succeeds Frank Lazaran, who was Winn-Dixie's president and CEO since June 2003 and was dismissed by the board.

Lynch, 53, is a 30-year industry veteran who started his career with Star Markets Co., Boston, where he ultimately became president. He was then senior vice president, store operations, at Jewel-Osco, Chicago, then a division of American Stores Co., before moving to American's Acme Stores division in Philadelphia as president. When American was acquired by Albertsons in 1998, Lynch was named president and chief operating officer of Albertsons and was involved in helping the Boise, Idaho-based chain cut costs and rationalize its operations. He left Albertsons about 18 months ago when the title of president was eliminated.

H. Jay Skelton, chairman of Winn-Dixie's board of directors, said that background will be useful at Winn-Dixie.

'The Right Leader'

Speaking during a conference call to announce Lynch's hiring, announced Dec. 10, Skelton said, "We face significant competitive challenges. We felt it was necessary to have someone with Peter's talents, leadership skills, and breadth and depth of experience. We now feel we have exactly the right leader for the company at this time.

"At Albertsons, Peter tackled some of the same operational challenges we face at Winn-Dixie. He was a key driver there of asset rationalization and cost-reduction initiatives. He knows how to drive change at a large retail organization, and he knows how to take care of customers."

Under Lazaran's tenure, he said, "several positive steps" were made, "but it was clear to the board we needed to make a change."

Skelton said the change in top leadership does not mean Winn-Dixie is abandoning the strategic initiatives it has been pursuing. "The board believes we've been focused in the right way, but we believe Peter's skills and experience will enable us to deliver better on those opportunities to improve sales and put the company is a more competitive position."

Lynch told SN he planned to confer with Lazaran as he begins to familiarize himself with Winn-Dixie's operations.

In the meantime, he said he's optimistic about reversing Winn-Dixie's fortunes, saying he plans to take "a hands-on approach to getting the needle moving on sales. We will move that needle, and we will get sales going. I'm here to build this company back to what it was.

"I see a potential for a business that has not been operated properly for years. As a result, sales and morale have eroded, and we've lost customers. But I see opportunities to win them back by improving merchandising, marketing and execution at store level, and having the proper products."

He expressed confidence that customers are still willing to give Winn-Dixie a chance. "I believe Winn-Dixie still has brand equity that it built up over many years. Just as customers in Philadelphia wanted Acme to succeed, I think customers here want Winn-Dixie to win. We've just got to give them a reason to come back.

"With the right direction, I think we can get them back," Lynch said.

The challenge is great: For the fiscal year ended June 30, Winn-Dixie sales fell 3.6%, to $10.6 billion. Comparable-store sales fell 5.9%, with a loss from continuing operations of $50.8 million. In the first quarter ended Sept. 22, comps were down 3.7%, and the loss from continuing operations was $153 million.

Winn-Dixie announced earlier this year it plans to close or sell 156 stores by next April. The company said 81 stores have been disposed of so far, and Lynch said the effort will continue.

However, it's too soon to know if further closings might be necessary, he said. "I need time to take a hard look at that, though I think we have a solid presence in several fast-growing markets. In several of those, we compete successfully.

'Taking a hard look'

"I'll be taking a hard look at how we can improve on the company's existing initiatives. At this point, it appears we are focused on the right areas and moving in the right direction. But we will work to improve on those initiatives and their execution, and explore additional options to improve our competitive position and operating performance."

Based on his initial observations, Lynch said some of his broad plans will include the following:

Improving the chain's brand image.

Continuing to upgrade the store base.

Strengthening the chain's commitment to customers by providing the highest quality of service and product selection.

Strengthening its partnerships with vendors "and making sure we do all we can to build those relationships."

Improving sales at many store locations by picking off a lot of low-hanging fruit that's available.

Giving consideration to making better use of Winn-Dixie's loyalty cards.

"These issues will not be solved quickly or easily, and no one move will complete the turnaround overnight," Lynch pointed out. "It will take a focused, well-based approach to building profitable sales at Winn-Dixie, and we intend to move quickly in that direction.

"There's a lot of hard work to be done here, but I can see the light at the end of the tunnel."

Asked how long it might take to reach that light, Lynch told SN, "It's too soon to comment. I need to get a little deeper into the situation here."

Analysts contacted by SN wondered about Lynch's ability to bring light to the tunnel. "Bringing in a new CEO at Winn-Dixie is like a losing sports franchise that hires a new manager," said Mark Husson, New York-based managing director and global head of consumer research for HSBC Securities, London. "Changing the manager doesn't mean the team will start winning. All it means is the team won't continue losing in the same old way.

"I'd like to know that a core group of stores in Florida are profitable. If I was sure of that, then I might believe the company could be turned around."

Jason Whitmer, an analyst with Midwest Research, Cleveland, said Lynch's appointment does not make him any more bullish about Winn-Dixie's long-term prospects. "Peter will find ways to introduce fresh ideas and a different perspective, which would be a plus, but Frank Lazaran had a good skill set as well. There's just not a lot to work with there in terms of asset quality, brand image, store locations and the ability to alter customer perceptions."

Jonathan Ziegler, principal at PUPS Investment Management, Santa Barbara, Calif., said he believes there should be room for Winn-Dixie to succeed in a state with a population as large as Florida, "and I think the situation there is salvageable. But there would probably need to be more retrenchment [than it's currently doing] outside of Florida."

Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., expressed more skepticism. "Lynch may be the answer to Winn-Dixie's problems, but the solution may be beyond his ability to help," he said.

'A Hands-on Executive'

"Historically, Winn-Dixie has had very mediocre execution at store level, and probably at the backstage level as well. That's something Peter may be able to fix. He's always been a very hands-on executive who's been able to get stores to run better department by department," Wolf said.

"But sales per square foot and sales per store are very low at Winn-Dixie, and that makes it hard for the company to be profitable. With its larger stores averaging sales of about $9 million per unit -- about half of what the major chains do -- it will be tough to turn things around, even without the competitive pressures Winn-Dixie faces from Publix and Wal-Mart."

Lynch said he was contacted by a recruiting agency about the Winn-Dixie job two months ago.

He said he had been contacted by various other companies over the years but was interested in the Winn-Dixie offer "because I've always had a lot of fun with turnarounds."

His contract with Winn-Dixie involves an inducement grant of 3 million restricted stock units, payable only in shares of the chain's common stock. Under terms of his contract, 2 million units will vest five years from the date of the grant and another 1 million will vest in equal installments on the first five anniversaries.

"I think it's appropriate to have stock in the company you work for," Lynch told SN. "If you perform, you get rewarded."