Winn-Dixie Gains Traction, Adjusts Remodel Strategy

ELLIOT ZWIEBACH

JACKSONVILLE, Fla. — Winn-Dixie Stores last week posted better-than-expected financial results for the third quarter and issued a rosy outlook for the rest of the year, driving the company's stock higher and drawing praise from analysts.

The company also said it is shifting its remodeling efforts to a market-by-market approach to better leverage spending.

Simeon Gutman, a New York-based analyst for Canaccord Adams, Vancouver, British Columbia, said the third-quarter improvements surprised him.

“Winn-Dixie's results were solid on an absolute basis and also contrast with the recent results of other supermarkets, which experienced softer to stable sales on weaker gross margins,” he said. “Winn-Dixie not only generated sequential top-line improvement, but it also did so in a high-quality fashion as gross margin expanded 81 basis points [to 28.9%].

“The business is clearly being well-managed in a difficult environment, and it now appears that Winn-Dixie's value perception, which is underestimated by [Wall] Street, is gaining more customer traction.”

Karen Short, an analyst with Friedman, Billings, Ramsey & Co., New York, said the chain's improved EBITDA results were due in part to a lower-than-expected last-in, first-out (LIFO) inventory charge of $1.2 million, “but the LIFO tailwind provided Winn-Dixie with some operating flexibility to be rationally promotional in order to maintain sales and market share.

“A testament to this conclusion,” she added, was the 0.2% increase in same-store sales — despite the negative impact of a shift in Easter — compared with a 2.8% comparable-store sales decline for roughly the same time period at Publix Super Markets, Lakeland, Fla. — a comparison, Short said, that “is noteworthy and impressive.”

For the 12-week quarter, which ended April 1, net income at Winn-Dixie rose 10.2% to $16.6 million, while sales increased 0.2% to $1.73 billion. Identical-store sales were up 0.2% (or 1.2% excluding the shift in the Easter holiday). For the 40-week period, net income jumped 66% to $30.4 million, while sales increased 1.1% to $5.7 billion and ID sales were up 1%.

Adjusted EBITDA rose 12.3% to $57.5 million for the quarter and 30.2% to $120 million for the year to date. Winn-Dixie boosted its EBITDA guidance for the year to a range of $145 million to $152 million, compared with earlier guidance of $110 million to $125 million, reflecting its expectation of maintaining “an appropriate balance between sales and gross margin,” the company said.

During a conference call with analysts last week, Peter Lynch, chairman and chief executive officer, said Winn-Dixie is preparing to begin upgrading stores on a market-by-market basis this summer — the second phase of its remodeling strategy.

The purpose of that effort will be to leverage operations and spending within specific markets, company officials told SN; however, they declined to pinpoint which markets would be impacted first.

Lynch told the analysts that decisions on selecting the markets and setting spending budgets will be finalized by the board later this month and announced in a mid-quarter conference call in June.

“We're still going to do 75 remodels a year — we're not going to slow that down,” Lynch said. But by doing them on a market-by-market basis, “there will be a mix of major remodels and some minor remodels, which may take down the overall spend,” he explained.

Lynch said Winn-Dixie is on schedule to compete 170 remodels by the end of its fiscal year in June, including 40 in the fourth quarter. Those remodels, scattered across the chain's operating area, represent about one-third of the store base; the company expects to complete remodeling nearly half the chain by the end of fiscal 2010 and substantially all stores by fiscal 2013, he noted.

Of the 74 offensive remodels completed over the past two years, 47 first-year remodels experienced year-to-date sales gains of 10% during the quarter, up from 9.6% in the second quarter, Lynch said, while the 27 offensive remodels in their second year had sales gains of 1.4% above the 11% sales lift in their first year after remodeling.

Asked if that was in line with the company's expectations, Lynch replied, “I feel good about the 1.4%, though I'm challenging my team for a little bit more than that — something closer to 2% to 3%.”

Lynch said Winn-Dixie achieved the second-year improvements by balancing out its promotions. “But I also think our teams are very, very focused and making sure they drive value, provide better customer service and offer better quality. At the end, of the day it's about execution, and that's where I think we're doing a very good job.”

Regarding defensive remodels, Lynch said those are performing “at or better than our expectations. We feel good that the money we've invested in those stores has protected our market share and prevented those stores from experiencing sales erosion, which would not be tolerable.”

Gutman told SN he believes the first-year remodeling results are solid at 10%, “but a pickup of just 1.4% in the second year seems a little low. As Lynch said, they need to be closer to 2% to 3%.”

Short said the better results at offensive remodels reflect an 8% boost in traffic and a 3% drop in basket size, with the drop resulting from the shift to private label and deflation in dairy.

Asked during the conference call whether Winn-Dixie anticipates closing some stores, Lynch said a number of units were on the bubble, “but we said if we had the right marketing program and got the whole company moving again that those stores would probably produce, and we've had very, very good results moving a lot of those into the profitability zone.

“There are still a few out there that are not producing profits, and we may prune them or hope the initiatives we are doing with them will turn them to profitability.”

The company also raised its EBITDA guidance for the year. It now expects fiscal 2009 adjusted EBITDA to increase more than 40% over fiscal 2008, to $145 million to $152 million, “which reflects the benefits of expected higher gross margin in the fourth quarter of fiscal 2009, compared with the prior-year period, as well as a reduction in the estimated full year LIFO charge,” Lynch said. “As you have seen so far in fiscal 2009, we have restored a more appropriate balance between sales and margins, and our revised guidance reflects our expectation that we will complete another successful year for our company.”

Q3 RESULTS