Winn-Dixie Boosts Margins in Q2

JON SPRINGER

JACKSONVILLE, Fla. — Effective promotional spending over the holiday season sparked a 1% year-over-year improvement in quarterly gross margins for Winn-Dixie Stores here, results that were stronger than the company's officers had anticipated.

“When we began the [fiscal] year we knew we had a significant opportunity to improve gross margins in the first and second quarters [and] we knew it would be challenging,” Peter Lynch, chief executive officer, said in a conference call discussing second-quarter earnings last week. “We needed to adjust the holiday promotional activity that the company had done historically, and we did it very successfully. I was confident we could show improvement but, candidly, our performance exceeded my expectations.”

Results for the 16-week quarter, which ended Jan. 9, show gross margins as a percentage of sales climbed to 26.7% from 25.7% in the same period a year ago. Adjusted EBITDA improved to $21.6 million, up from $500,000 a year ago. Sales increased 0.7% to $2.2 billion, and identical-store sales were up by 0.5%.

Net income of $4.1 million, or 8 cents a share, was down from $287 million in reported net earnings last year, which were affected by a $338.4 million gain from reorganization activities.

The strong quarterly results prompted Winn-Dixie to adjust its estimated yearly EBITDA forecast to $105 million to $125 million, from earlier expectations of $95 million to $115 million. Investors subsequently bid up Winn-Dixie stock by more than 10%.

“We've said many times our goal is to achieve the appropriate balance of sales and margins in order to grow profitable sales,” Lynch said. “Our second-quarter earnings demonstrate our ability to grow margins while also growing identical sales.”

Officials noted that they expect margins would be in line with year-ago results for the remainder of the fiscal year, while sales could increase slightly. The chain will step up its store renovation pace in the second half with a goal of completing 75 renovations during the year. Combined with 20 stores renovated last year, that would comprise approximately 18% of Winn-Dixie's store base since emerging from Chapter 11 bankruptcy protection in late 2006.

Renovated stores are seeing sales improvements of around 12% following their grand reopening period, officials said. That was down from a 15% figure provided in Winn-Dixie's first-quarter call, a difference Lynch attributed to an “umbrella effect” of less aggressive promotions chainwide during the quarter.

Officials said the sales increase in the quarter came from larger shopping baskets, despite an overall reduction in store traffic. Remodeled stores are seeing increases in basket size (6.8%) and traffic (5.2%), and their improved productivity ultimately will help Winn-Dixie better leverage its fixed costs.

“Our sales per square foot have traditionally run around $300 a foot and our competitors' running about $450. That's the leverage we have on the upside,” Bennett Nussbaum, chief financial officer, said.