WINN-DIXIE SETS REFORMS IN WAKE OF SHARP LOSS

DAvid Ghitelman

JACKSONVILLE, Fla. -- Winn-Dixie Stores here, which just suffered an unexpected $79.5 million quarterly loss, has come out fighting.

The company said it has launched a turnaround effort focused on making its stores better lighted, strengthening its perishables offering and, probably, cutting back on its geographic range.

During a conference call late last month with industry analysts to discuss results for the second quarter and half ended Jan. 7, Frank Lazaran, Winn-Dixie's president and chief executive officer of a little more than six months, declared, "This company needs to change."

The key changes Lazaran outlined included repositioning the company's brand upward, cutting expenses, possible market withdrawals, an ambitious store-remodeling program, and a comprehensive look at organizational effectiveness and accountability, beginning with Winn-Dixie's central procurement operation.

However, analysts were skeptical of whether Lazaran's program could reverse the company's fortunes. Mark Husson, an analyst at Merrill Lynch, New York, told SN, "All this will take time and money, and we don't know whether they've got enough of both."

Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., offered a similarly dire assessment. "I think they have a lot of work cut out for them," he said, "and the odds are not good."

Standard & Poor's Credit Ratings Services, New York, also expressed doubt about Winn-Dixie's prospects, lowering the company's corporate credit rating to B from BB. Mary Lou Burde, an S&P credit analyst, explained, "The rating actions reflect a severe and rapid deterioration in Winn-Dixie's operating performance [as demonstrated by very poor results in the fiscal 2004 second quarter], and concerns that a failure to improve the business could strain financial resources."

Winn-Dixie responded to the credit agency in a statement asserting the "company has adequate liquidity and cash flow to fund current ongoing operations."

However, investors did not appear soothed by the company's reassurances. In the first three days of trading following the release of the second-quarter results, Winn-Dixie's stock plunged 36.1% to close at $5.81 per share, a 20-year low.

In addition, Winn-Dixie said it would suspend its quarterly dividend indefinitely. Most recently, the company issued a 5-cent-per-share dividend in late January.

Also, last week at least two law firms filed securities fraud class-action lawsuits against Winn-Dixie, charging, that the company "was suffering from undisclosed long-term business and financial problems" while Lazaran and, before that, his predecessor as CEO, Al Rowland, who stepped down in June, were assuring the public that all was well with the business.

During the conference call, Lazaran made clear that all wasn't well. "We have to fundamentally change our culture," he said. He explained that Winn-Dixie must shift from a "buy" to a "sell" mentality.

"We have always bought products for price," he said. "We need to be buying products for our customers."

The five-point plan to change the company, according to Lazaran, includes:

Brand repositioning. Winn-Dixie has retained VML, Kansas City, Mo., a marketing company that is a subsidiary of the London-based WPP Group. VML, Lazaran said, has already conducted research that shows Winn-Dixie needs to "enhance our focus on our perishables departments."

Cost-cutting. Lazaran said he intends to achieve a $100 million annual savings in costs by July 1.

A core-market analysis and asset rationalization review. Lazaran said the analysis and review will be completed in the third quarter and presented to the company's board for approval in April. He added that his goal is to record all restructuring charges by the end of fiscal 2004.

An image makeover program. Lazaran said Winn-Dixie is accelerating its remodeling efforts to touch a total of 700 stores within the next year. These resets, he noted, will feature enhanced lighting as well as the company's new produce layout.

Process reengineering. Lazaran explained that the company has to change not only its strategy, but also its "underlying business processes to support the new strategy." He noted that when Winn-Dixie centralized its procurement function several years ago, it brought all the people doing procurement into one place, but it did not change the procurement process.

Analysts said at least some of these elements could succeed. Merrill Lynch's Husson noted that the image makeover could win back customers. "What you have to do is find a way to communicate that you're delivering on cleanliness, freshness and variety, all the stuff that isn't exactly where Wal-Mart is, and reupholster the brand."

Asked if that niche wasn't already occupied by Publix Super Markets, Lakeland, Fla., Husson replied, "Publix is a fine company, but I don't think they do an outstanding job on fresh. They do a pretty average job on fresh, but their brand is better than Winn-Dixie's brand, so people are prepared to believe they are much better."

BB&T Capital's Wolf also observed that going upscale could work for the company, just as it has for the Salisbury, N.C.-based Food Lion chain, a subsidiary of the Belgium-based Delhaize Group. "It's the right direction," he said. "Food Lion has been able to get their sales going, get some sales momentum with a strategy of upgrading perimeter departments and remodeling, and maybe Winn-Dixie thinks they need to emulate that."

Husson also said he thought the goal of cutting $100 million in costs by July was achievable. "They've still got horrible shrinkage, so there's potentially $100 million in the shrinkage number," he said. "Getting shrinkage down from 3.75% to 1.5% of sales would give them a huge cost-savings number."

Yet, Gary Giblen, director of research and senior vice president, C L King Associates, New York, said he thought the $100 million figure was unrealistic. He noted that Rowland, who closed 114 stores and eliminated 11,000 jobs in April 2000 several months after he become CEO, "had already cut the costs that could be cut."

In addition, Husson stressed the importance of selling the stores outside Florida at a good price.

2ND-QUARTER RESULTS

Qtr Ended 1/7/04; 1/8/03

Sales: $3.6 billion; $3.8 billion

Change: -6%

Comp-store: -6.8%

Net Income: ($79.5 million); $91.4 million

Inc/Share: (57 cents); 65 cents

28 Weeks 2004; 2003

Sales: $6.2 billion; $6.6 billion

Change: -5.9%

Comp-store: -6.7%

Net Income: ($78.3 million); $126.2 million

Inc/Share: (56 cents); 90 cents