Winn-Dixie Turnaround Efforts Begin to Take Hold

Winn-Dixie (WINN) reported first quarter earnings substantially above analyst expectations. The Southeast regional grocer rang up sales of $1.70 billion, resulting in a loss of 4 cents for the quarter. The consensus of analyst estimates forecasted revenues of $1.65 billion and a net loss of 14 cents. Sales for the quarter were up 3.4%. The company's EBITDA increased a respectable 38% from $19.5 million to $27 million. The company stood by its previous EBITDA guidance of $110 to $125 million for fiscal 2009, which is a very impressive accomplishment during today's harsh economic conditions. Peter Lynch, WINN's CEO, indicated he was very pleased with the financial results.

The benefit of hurricanes: Believe it or not, the hurricanes actually aided sales. Customers who had worried about potential supply issues tended to stock up on essentials before the storms. WINN was efficient at reopening their stores in a swift manner just after the hurricanes passed, enabling them to attract customers from competitor locations that were slower to reopen. Lynch stated on WINN's conference call that it was too early to calculate how many new customers might be retained as a result. Transaction counts were lower, however basket size was higher due to the effects of the hurricanes.

Analyzing the income statement: WINN's gross margin improved 40 basis points from 27.5% to 27.9%. The progress was attributable to product mix changes, operational improvements and reduced inventory shrinkage. Operating and administrative costs rose 4% from $449 million to $468 million. This cost as a percentage of sales rose 20 basis point from 27.7% to 27.9%. The increase in this category was primarily due to higher depreciation costs associated with the remodels, as well as higher payroll and utility expenses. The company had $1 million of interest charges versus $1.4 million of interest income the previous year, resulting in a $2.4 million negative swing, if not for this anomaly, WINN would have avoided a loss for the quarter.

Generic brand program: WINN's corporate brand program's (private label) progress is ahead of schedule with a 22% penetration rate, which represents an improvement of 150 basis points from the prior year. The company currently has 1,900 line items in the program and plans to increase it to 3,000 items by the end of fiscal 2009. Peter Lynch stressed that the private label program is more important than ever, as more consumers become value oriented. The private label brand delivers higher margins and enables customers to perceive better value, critical in these cost conscious times.

Cash windfall: The company announced a $25 million cash settlement due to insurance proceeds from damages incurred during the 2006 hurricane season. The gain on the settlement will be recorded in the second quarter, but will not be included in EBITDA.

Store remodel update: WINN has completed 96 remodels since embarking on their remodeling program. The company intends to complete an additional 150 stores by the end of 2010, and conclude their remaining 250 locations by 2013. Remodeled stores have shown a 11.6% weighted average sales lift versus the same period of the prior year. WINN has ample liquidity to continue the program, potentially drawing on $162 million in cash and borrowing availability of $491 million.

Bottom line: The shares are still cheap even after yesterday's 12% markup. WINN is selling at only .75 of book value and a meager price to sales ratio of .09 (low versus KR's and SWY's .22 ratio, but marginally higher than SVU's .06 ratio). The company has ample opportunity for substantial improvement, and has shown several consecutive quarters of positive development since emerging from chapter 11 in January of 2007. WINN's median one year price target is too conservative at $16.50 - the shares are more likely to reach the $20 vicinity in the next 12 months.

Disclosure: Long WINN, SWY, KR and SVU.