Weak Forecast Sinks Winn-Dixie Stock

JON SPRINGER

JACKSONVILLE, Fla. — Winn-Dixie last week reported increases in sales and profits for its fourth quarter and the 2007 fiscal year, but a forecast that it would lose money in fiscal 2008 contributed to a collapse in its stock price.

Expenses related to a store remodeling program, and non-cash items like depreciation and amortization, stock compensation expense and charges related to bankruptcy emergence, will exceed adjusted EBITDA in the 2008 fiscal year, which began June 28, according to Bennett Nussbaum, Winn-Dixie's chief financial officer. Though officials declined to pinpoint projected EBITDA, one analyst estimated the retailer would report around $120 million to $140 million — or less than the $180 million published in Winn-Dixie's plan of reorganization, and also less than might have been divined by projecting results from recent quarters.

“It was fair to say there was an expectation of steady improvement,” the analyst, who asked not to be identified, told SN. “There were some people out there figuring they could do more than $200 million easy.”

The stock collapse returned nearly all the gains made after Winn-Dixie's third-quarter earnings announcement in May. Sources said the fourth-quarter figures released last week were similarly strong but were marred by guidance that analysts variously described as “shadowy,” “cryptic” and “murky.”

“The decline wasn't associated with the results of the fourth quarter. The reason for the decline was, in part, the inability of management to articulate or explain their guidance,” Karen Short, an analyst for Friedman Billings Ramsey, New York, told SN.

Short said the decline also illustrated a decreased taste for risk in the market compared with only a few months ago.

“Investment psychology has changed,” she said. “The market hasn't any tolerance for anything that isn't crystal-clear.”

The skittish investor reaction and uncertain near-term projections came despite progress on several fronts in Winn-Dixie's turnaround.

“It sounds like they are seeing the uplift in margins and the support from vendors we had hoped they would post-bankruptcy. Liquidity is incredibly strong; they are investing in the store base the way they said they would; and they're seeing a sales lift as a result of that investment,” Kathleen Brady, an analyst with Bank of America Securities, told SN. “Regardless of all that, it was a little weird they were saying they were going to be net-income-negative for 2008.”

Peter Lynch, Winn-Dixie's chief executive officer, said Winn-Dixie would make steady progress in the year ahead. The company plans to spend around $250 million on store renovations, with the majority scheduled during the second half of the year. Most of the renovations will be in Florida, he said.

Winn-Dixie is experiencing average sales lifts of around 12% at the 20 stores it renovated since emerging from bankruptcy late last year, Lynch added. However, he noted that the benefits of renovated stores tend not to reach the bottom line until their second year, when launch and advertising costs associated with the renovation are behind the company.

Cost reductions and a 2% increase in sales contributed to a profit of $20.6 million in the fourth quarter, vs. a loss of $17.2 million a year ago, Lynch said. For the fiscal year, which included 20 weeks operating under Chapter 11 bankruptcy protection, Winn-Dixie had sales of $7.2 billion and profits of $300.6 million. Identical-store sales increased 1.3% for the quarter and 1.6% for the fiscal year.

Average basket size was up 3.4% in the quarter and 4.1% for the year, although store traffic declined 2.7% and 1.7%, respectively. Effective pricing and promotional programs, combined with a shift toward perishable items, helped increase the basket size. The declining traffic reflected an aging store base and increased competition.

Lynch said competitors Wal-Mart, Publix and Sweetbay have all been aggressively investing in price and promotion in recent months. Wal-Mart, Lynch noted, recently bought newspaper spreads promoting Labor Day sales.

Lynch said the company will work to make progress on key initiatives as part of its turnaround plan. Around 150 items have reached store shelves as part of the company's three-tier private-label brand, with a goal of increasing that number to 1,000 by fiscal year-end and boosting penetration to around 20.5% from the current level of 19.1%.

Dan Portnoy, recently named chief merchandising and marketing officer, will tackle an initiative to tailor stores to their neighborhoods, Lynch added.