Winn-Dixie Eyes Slow Recovery

MARK HAMSTRA

JACKSONVILLE, Fla. — Analysts say Winn-Dixie Stores here is weathering the recession about as well as can be expected, but the company still faces a difficult year ahead.

Last week the retailer posted a loss of $8.1 million for its fiscal first quarter and same-store sales declines of 1.5%, and explained that it expected to face considerable headwinds going forward from frugal shoppers, a stubborn lack of inflation and ongoing competitive pressures.

“Given the current state of the economy, we expect that generating significant improvement in sales lift over the next several quarters will be challenging,” said Peter Lynch, president and chief executive officer, in a conference call with analysts. “Both our experience and that of our competitors indicates that the effects of the recession are finally filtering down to the grocery budgets much more than they did [last year].”

In the longer term, however, he said he remains “very confident” in the company's strategy, citing strong gains in transaction counts at remodeled stores and a more disciplined approach to pricing.

Product-cost deflation in the first quarter and a reduced outlook for inflation in the year ahead make forecasting sales gains difficult, Lynch said. However, given the frugal shopping environment and the expectation of ongoing pressure from competitors, the company did trim its outlook for fiscal 2010 EBTIDA to a range of between $140 million and $160 million. It previously had projected that EBITDA would be $170 million to $180 million for the year.

The company said same-store sales would have been flat in the first quarter if two factors were excluded — a 100-basis-point bump the chain received in the year-ago quarter from the benefit of hurricane-related sales, and a 50-basis-point decline in the recently ended first quarter due to a shift toward more generic pharmaceutical products.

The same-store sales decline was attributable entirely to a decline in basket size, the company pointed out, as traffic levels remained flat. First-year same-store sales at remodeled stores averaged a gain of about 7.1%, reflecting increased transaction counts and tonnage but flat basket size, Lynch said.

He said same-store sales in the second quarter were trending below the 1.5% decline reported in the recently ended first quarter.

Karen Short, a New York-based analyst with BMO Capital Markets, lowered her previous estimate for second-quarter same-store sales to -2%, down from her previous estimate of -0.8%, based on the first-quarter report. For the year, she expects a 1.3% decline.

She also said she expects EBTIDA to be about $135.5 million for the year, slightly below Winn-Dixie's own estimates.

“Given the lack of visibility on the environment and deflation, sales are indeed a wild card,” she wrote. “But, unfortunately, because cost-cutting and gross-margin enhancing opportunities are limited, EBITDA is extremely sensitive to the top line. As a result, due to lack of sales visibility, we see risk to achieving the [company's] reduced EBITDA guidance.”

She commented, however, that Winn-Dixie management was “navigating the challenging environment extremely well.”

The company reiterated its position that it would not “over-promote” in the weak economy to drive sales at the expense of margins, despite ongoing promotional activity from competitors in its Southeastern market areas.

“Our response will remain strategic and measured, and we will not overinvest in price simply to chase sales,” Lynch said. “Given the uncertain environment, it is more important than ever that Winn-Dixie maintain a sharp focus on those elements within our control, and with that in mind we will be careful to manage our operations and cost base in a very disciplined manner.”

Lynch also said the company has been increasing its market share in several markets, including overall in Florida, Mississippi and Alabama. In Georgia and Louisiana, however, market shares are down.

The New Orleans area in particular has gotten much more competitive recently with new openings from Wal-Mart Stores and some independent operators, he said.

Citing competitive reasons, Lynch declined to discuss the impact of the “Fresh Checked Every Day” quality-oriented campaign that Winn-Dixie recently rolled out in Jacksonville, other than to say it had been well-executed.

He said Winn-Dixie expects inflation to be flat in the near term, but it projects a slight increase in the second half of its next fiscal year (the first half of calendar 2010). He also noted that Center Store inflation has been flat, with most of the deflation occurring in perishables categories.

Sales in the more recent quarter, which ended Sept. 16, fell 2%, to $1.64 billion, which the company attributed to the closure of six locations in the last fiscal year and the same-store sales decline. In the year-ago first quarter, the company posted a loss of $2.3 million.

As a percentage of net sales, gross margin was 28.3% in the most recent quarter, vs. 27.9% in the first quarter of last year. Winn-Dixie attributed the gain to lower warehouse and transportation costs, a lower inventory accounting charge and reduced promotional activity, partially offset by an increase in shrink.