Opportunistic Investors Target New Winn-Dixie Stock

JON SPRINGER

JACKSONVILLE, Fla. — While some industry observers remain skeptical about the prospects of Winn-Dixie Stores here, opportunistic investors chasing big scores last week helped lift new stock in the reorganized retailer toward the high end of the company's own range of valuation.

Winn-Dixie stock, which last week was still trading on a “when-issued” basis on over-the-counter exchanges, shot up from around $11 per share to more than $15, taking market capitalization from around $600 million to more than $800 million. Winn-Dixie bonds also jumped from around 75 cents on the dollar weeks ago to more than 98 last week.

That activity, according to one source, was “eye-popping” and suggests that early-stage investors were more than comfortable with the $749 million valuation Winn-Dixie's financial advisers placed on it in the retailer's reorganization plan this summer. (The estimate, by Blackstone Group, ranged between $615 million and $880 million, with $749 million as a midpoint. Based on Winn-Dixie's closing price last Thursday, the market valued the company at $871 million.) The stock began its ascent shortly after the company clarified the amount of outstanding shares in a press release Nov. 28.

Buyers of Winn-Dixie stock included hedge funds and other strong-stomached investors eyeing various routes to earnings targets set by the retailer in its disclosure plan. These include assumptions that Winn-Dixie can generate cash through improved terms with vendors; that it has value hidden in its leases and real estate; sentiment that the market has overcompensated for the threat of discount competitors like Wal-Mart Stores; and speculation over Winn-Dixie's strategic value in the event of industry consolidation, sources told SN. They also noted the stock was trading cheaply as a percentage of revenues when compared with other food retailers.

The stock price “might not be indicative of their operating model, but it is indicative of their intrinsic value,” Robert Koltai, of the Rutherford, N.J.-based hedge fund Hain Capital, told SN last week. “This company is worth more than $750 million, based on the size of their revenues and their footprint.”

Bulls perceive “a low hurdle” for Winn-Dixie to reach projected EBITDA of $180.7 million in fiscal 2008, another source, who asked not to be identified, told SN. That figure requires Winn-Dixie to achieve EBITDA margins of 2% — low by industry standards, but a considerable leap for a company still struggling to show profits after 21 months in bankruptcy.

“You have people involved in the situation prior to bankruptcy that have a more pessimistic view, but you have to realize, as this thing transitions from [trading on] bonds, to when-issued equity, to shares distributed, you get a new investor base giving this company a fresh look,” the source said. “It's a whole new group.”

STORE RENOVATIONS

Winn-Dixie shares will begin trading on the NASDAQ market when sufficient liquidity is reached, possibly later this month, said Michael Frietag, a spokesman for the retailer. The company, which exited Chapter 11 protection Nov. 21 with a $725 million line of credit and minimal debt, is proceeding with plans to renovate its store base. Two stores in New Orleans and one in Columbus, Ga., have already been renovated, and the company has plans to complete another 47 makeovers by late June.

Winn-Dixie targeted capital spending at 2% to 2.8% of projected sales, or $146 million to $200 million in cap-ex this fiscal year.

Some industry observers are skeptical of Winn-Dixie's prospects. John Crossman, president of Orlando, Fla.-based real estate services firm Crossman & Co., said the grocery business in Florida during Winn-Dixie's stay in Chapter 11 has only grown tougher, due not only to dominance by Publix but through expansion of other concepts like the Hispanic banner Sedano's, natural players like Wild Oats and Whole Foods, and price operators like Save-a-Lot.

“Publix is still the New York Yankees of the grocery business in Florida, but where it used to be Publix up and everybody else down, today it seems like Publix is up and a lot of others are up too,” Crossman told SN. “What Publix, Save-a-Lot and Sedano's have in common is that they all clearly know their customer, and their customer knows who they are. For Winn-Dixie to succeed here they have to define their customer.”

SERVICE, SELECTION, QUALITY

Peter Lynch, chief executive officer of Winn-Dixie, told SN earlier this year that he envisions Winn-Dixie trading on service, selection and quality, and emphasizing perishables.

While Winn-Dixie used Chapter 11 to back out of undesired leases, exit tough markets and close unprofitable stores, some locations remain troublesome due to anticipated competitive openings, sources said.

“It looks like they didn't reject enough leases,” said Burt P. Flickinger III, managing director, Strategic Resource Group, New York. “From our research it looks like Winn-Dixie has some exposure to Wal-Mart Supercenter openings over the next 500 to 700 days. Supercenter openings have been devastating to Winn-Dixie in the past.”

The nature of development in Florida tends to blunt real estate alone as a competitive advantage, according to David Marks, president of Marketplace Advisors, a retail real estate company in Orlando.

“It's difficult in Florida just to make it on good real estate, since everybody drives anyway and most people are used to going to the discount store for their general merchandise,” Marks told SN. “Wal-Mart doesn't have many Main & Main locations in Florida, but still, their parking lots look like Christmas.”

Investors who spoke to SN disagreed as to whether the possibility existed for a “Kmart-style real estate play” to unlocking value in below-market leases. Koltai maintained there was value in the footprint itself, noting, “it would be hard to duplicate from scratch.”

Koltai added that investors might also be attracted by the notion that better credit terms from vendors could allow Winn-Dixie to invest “float” as a means of generating additional capital.

“I think there's a realization out there that if they're able to tweak their model even slightly, there's incredible cash revenue,” he said. “I don't know whether they can do that, or if they will be successful, but if they aren't, there might be someone else out there who would like to.”