WINN-DIXIE CITES COMPETITION IN 4TH-QUARTER SALES DECLINE

Mark Hamstra

JACKSONVILLE, Fla. -- Winn-Dixie here said it would invest heavily in pricing and promotions in 2004, a move that it expects will wipe out its first-quarter profits and reduce earnings for the year to 20% below analysts' previous estimates.

The company said highly aggressive pricing by competitors, especially traditional supermarket chains, led the company to post same-store sales declines of 4.5% in the 12-week fourth quarter ended June 25. Without the benefits of the later Easter holiday this year, the decline would have been 5.5%.

"We lost track of driving sales, and we really want to move the sales needle," said Frank Lazaran, chief executive officer, Winn-Dixie, during a conference call discussing results for the quarter and year. "Our plan is to invest in pricing and promotion, and we are serious about investing."

He said the company recently had focused much of its attention on improving efficiency at the 1,073-store company, but it failed to react quickly enough to lower its pricing to drive sales. Winn-Dixie would use its rewards card to achieve its pricing goals, he said, which will require significant investment in the first and second quarter. The company expects sales and profit growth to recover later in the year.

"We're seeing some competitors do some things we've never seen in the past," said Rick McCook, senior vice president and chief financial officer, describing some promotions in which supermarkets are offering large discounts to consumers who spend a certain amount. The company said aggressive promotions by competitors have continued in the first quarter.

Industry observers said that among Winn-Dixie's traditional competitors, Publix Super Markets, Lakeland, Fla., has recently increased its promotional activity, while Kroger Co., Cincinnati, and Albertsons, Boise, Idaho, said they have become more aggressive with their pricing.

In a research note containing a rare "sell" recommendation, Mark Husson, analyst, Merrill Lynch, New York, said Winn-Dixie's negative comparable-store sales performance in the quarter "suggests it has misread the competitive environment as other competitors...have closed the gap on pricing with Wal-Mart, while Winn-Dixie appears to have stood still."

In addition to a renewed commitment to pricing and promotions, Lazaran also said Winn-Dixie planned to focus on improving store-level operations. To help achieve those improvements, he said the company has increased spending on its mystery shopper program, which he said has been successful at other supermarkets companies. He was with Randalls and Ralphs before joining Winn-Dixie last year, and he was named president and chief executive officer earlier this year.

"We are really going to understand what our customers see when they come into our stores," he said.

Winn-Dixie also said some one-time events affected its bottom line in the fourth quarter. The company said it took a charge of $5 million after taxes in the quarter to meet the terms of a retirement agreement with Al Rowland, the former CEO.

The company said it negotiated a final settlement with the Internal Revenue Service on some tax issues, causing it to reverse $28 million in reserves. Last year the company paid $52 million to settle the tax dispute.

That helped Winn-Dixie post better bottom-line results in the fourth-quarter and full-year periods. The company said its net income from continuing operations was $62.5 million, or 44 cents per share, up 18.4% over year-ago levels. Including charges for the company's discontinued operations, Winn-Dixie posted a loss in last year's fourth quarter of $21.9 million. Revenues in the recently ended fourth quarter totaled $2.73 billion, down 4.6% from year-ago levels.

For the year, the company reported net income from continuing operations of $239.23 million, or $1.70 per share, up 27.8% from year ago levels. Including charges for discontinued operations, net income last year was $86.9 million. Revenues for the recently ended fiscal year were $12.2 billion, down 1.3% from the prior-year total.

The company said it expected net income in the first quarter of fiscal 2004 to be flat, and earnings to be $1 to $1.04 for the year.

The company also said it had reinstated its site-development program, with plans to spend $200 million to $210 million in capital expenditures in 2004. The company said it expected to close as many stores as it opens, however, for no anticipated net gain in store count.

Winn-Dixie's stock fell about 15%, to under $10 per share, on the day after its earnings announcement.