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WINN-DIXIE LOSS SPURS CONCERN OVER RECOVERY

JACKSONVILLE, Fla. -- In his first public report since assuming leadership of Winn-Dixie Stores here two months ago, Peter Lynch said he would act quickly to raise top-line sales as losses mounted at the beleaguered retailer.Winn-Dixie reported a loss of $400 million, including discontinued operations, on sales of $3.1 billion during its fiscal second quarter ended Jan. 12. In a conference call discussing

JACKSONVILLE, Fla. -- In his first public report since assuming leadership of Winn-Dixie Stores here two months ago, Peter Lynch said he would act quickly to raise top-line sales as losses mounted at the beleaguered retailer.

Winn-Dixie reported a loss of $400 million, including discontinued operations, on sales of $3.1 billion during its fiscal second quarter ended Jan. 12. In a conference call discussing the results last week, Lynch, the former Albertsons executive named chief executive officer of Winn-Dixie in December, fielded questions from analysts concerned that Winn-Dixie's vendors may tighten credit terms, which combined with losses and sales declines, could send the company into a financial crisis.

One analyst, Karen Miller of Bear Sterns, New York, told SN that bankruptcy would be a possibility if the chain's recent trends continued.

"It depends on whether the vendors accelerate their credit terms, and on the proceeds [Winn-Dixie] can get from asset sales, and whether they can increase top line sales," she said. "There are still a lot of unknowns."

The earnings news sent Winn-Dixie stock tumbling by 35.7% Thursday to close at $2.25, a new low for the year.

Winn-Dixie noted in a Securities and Exchange Commission document last week that it has experienced some tightening of terms with vendors. The company had around $410 million in accounts payable at the end of the quarter. The company currently has around $275 million in borrowing ability. Its banks extended a credit waiver, through the end of its fiscal year that restored $100 million of borrowing ability that would be lost because Winn-Dixie failed to meet the terms required.

"Obviously, the thing that stuck out from the SEC filing was the point about credit terms being shortened," said one analyst who spoke to SN on the condition of anonymity. "And that's a sign of a company with liquidity issues and trouble paying their bills. When a company gets into real trouble, it's often the vendors that pull the plug."

Lynch told analysts in the conference call that he has been meeting with vendors individually every week, and that the company has invited all of its vendors to attend a meeting. "We want to talk to them about our opportunities to work together and create a better company with stronger sales," Lynch said.

To that end, Lynch detailed a series of moves intended to boost sales by the fourth quarter. While Lynch characterized the asset rationalization and lead market store remodels enacted a year ago by his predecessor, Frank Lazaran, as "important steps in the right strategic direction," he noted the company "has not been taking advantage of competitive advantages, trying to do too many things at once and has lost the focus on sales" in the meantime.

"Execution of the basic merchandising and other sales tactics simply has not been good," he said. "My No. 1 priority is to drive profitable sales across the entire chain."

Lynch's plan to boost sales, which he said has been effective in other turnarounds, will focus on better perishable offerings; better store merchandising; stronger vendor relationships; and on motivating store managers and employees to focus on sales. "These improvements aren't rocket science, they do not require a lot of capital expenditures to fix and they can be implemented quickly," he said.

Merchandising improvements are already under way in a "hub-and-spoke" system in which certain stores in each marketing area have received the improvements and serve as the model store and training area for other district stores.

Lynch said he would meet store managers and associates over the coming weeks and "energize and motivate them," with sales contests and other efforts. "I plan to support our associates and enable them to provide the highest quality service by making simple, sales-focused improvements to Winn-Dixie store operations."

Store renovations in Winn-Dixie's lead markets of Miami-Fort Lauderdale and Montgomery, Ala., have resulted in better sales results than the overall chain but Lynch declined to say whether the renovated stores achieved positive sales gains. He added he would incorporate "the best elements" of the renovations that don't require significant capital to all of Winn-Dixie's stores. The company would complete the remaining 27 store makeovers in the Miami market as planned by the end of March and begin an advertising campaign to support the stores then.

Winn-Dixie's quarterly loss of $2.84 a share, including discontinued operations, and a comparable-store sales decline of 4.9%, was greater than what many analysts expected. The company noted that holiday sales were slower than expected, and Winn-Dixie saw higher inventory levels, higher shrink, and lower gross profits as a result. The company noted store traffic was down, which it attributed to competing store openings in its trade areas and promotional activity.

Rob Campagnino, an analyst with Prudential Equity Group, New York, said in a research note that the continuing competitive environment, along with financial concerns, will make a successful turnaround challenging and perhaps too expensive for Winn-Dixie's resources.

"These core [Southeast] markets are among the most competitive in the country and Winn-Dixie's closest competitors saturate the market," Campagnino said. "We are not convinced the company currently retains sufficient cash flow to turn declining comps around prior to a liquidity event."

Winn-Dixie said it has completed 135 of its planned 156 store closures as part of the rationalization plan announced last year. It has thus far sold or subleased 63 of the stores. Announced store closures will be complete by the end of April, although Lynch did not rule out additional store closures or assets sales in the future.

The company has closed four warehouses as announced and has begun to market for sale its dairies, Chek Beverage, Deep South Condiments and Astor Products manufacturing facilities. It said its Crackin' Goods Bakers and Crackin' Good Snacks facilities have been sold, and that its Montgomery Piazza facility would close by the end of April. Its Miami dairy and Greenville, S.C., ice cream plant have been closed.