Winn-Dixie Roars Back With Earnings Surprise

JON SPRINGER

JACKSONVILLE, Fla. — Winn-Dixie's turnaround is off to a stronger start than many observers anticipated.

Stock in Winn-Dixie soared by about 37% last Tuesday after the retailer here reported earnings of $17.8 million, or 33 cents per share, and EBITDA of $46 million for the fiscal third quarter that ended April 4. Overall sales of $1.7 billion were flat for the period, but identical-store sales increased by 1.6%, reflecting larger average shopping baskets driven by better store execution and customer service, the company said.

Karen Short of Friedman Billings Ramsey, the only equity analyst following Winn-Dixie since its emergence from Chapter 11 bankruptcy protection late last year, had expected earnings of around 7 cents per share and EBITDA of $20.1 million. “I was positive but not positive enough,” Short told SN in an interview last week.

She also said the stock price may have been driven by so-called “short sellers,” who had bet the stock would lose value.

“In short, our success in the third quarter was primarily driven by the execution of our turnaround plan,” Peter Lynch, president and chief executive officer, said in a conference call last week.

According to Lynch, Winn-Dixie had made progress on five key initiatives of its turnaround: rebuilding its brand image; investing in store remodels; employing merchandising and marketing geared toward local markets; training employees; and generating profitable sales.

Lynch announced that a revamped, three-tier line of private brands will be introduced on Winn-Dixie store shelves in July. The company will use the Winn & Lovett brand for its premium items, Winn-Dixie for its main tier and Thrifty Maid for value products. Winn-Dixie will also be keeping its Chek beverage and Cuddles baby sub-brands, Lynch said.

The products will be launched with new packaging, and accompanying advertising and sampling programs, at a rate of around 250 new products per quarter, Lynch said. A recently renovated “laboratory store” in Macclenny, Fla., will serve as the basis for elements to be incorporated in the 75 remodelings the company intends to complete annually, Lynch said. Macclenny was completed about two months ago and emphasizes a vibrant perishable offering.

Seven stores that were remodeled during the quarter showed sales increases of 12.6%, said Lynch, who cautioned, however, that the stores were not open long enough to provide predictable performance data.

Lynch said service at stores and recruitment will be achieved by a new stock incentive program for store directors known as the President's Club.

“We believe this is an important retention tool, and a great motivational tool to create a competitive spirit to reward great performance and achieve our organization's goals,” Lynch said. “It is also a valuable tool for recruitment, allowing us to recruit top retail talent — managers who are driven to achieve at a high level and appreciate the upside potential provided by stock ownership.”

Lower levels of promotional spending, and reductions in transportation costs and shrink, helped bring gross margins up to 27.9% of sales, from 25.7% in the second quarter and 26.5% in the third quarter of last year, Lynch said. “Our focus on offering balanced sales and promotional programs drove revenues higher, while allowing us to maintain a profitable gross margin,” he said.

Winn-Dixie's success took many by surprise, in part because there was little data to base projections on, said Short, noting that the company emerged from bankruptcy after its fiscal second quarter had already begun. Much of the stock price increase, she said, came as the result of so-called “short covering,” or investors who had bet Winn-Dixie would lose suddenly having to buy stock under obligation.

“They piled into this without doing a lot of work,” Short said. “They just went with the conventional wisdom that [the] stores are messy and dilapidated, the company has no reason to exist, they emerged from bankruptcy with no EBITDA and they're never going to make it. That was the thesis.

“With a little more work, you could scrub through the numbers and realize that from the clean, eight-week-old successor company, you could take their SG&A [selling, general and administrative expense] rate and see they could generate EBITDA.”

Short cautioned that conditions including inflation and population growth probably helped the numbers during the quarter, as did a struggling competitor in Bruno's in Alabama. “It's a little dangerous to assume this will carry through,” she said, but added that the spike in the stock price last week brought Winn-Dixie above what she considered a target price of around $27 per share.