Winn Dixie's Roller Coaster Ride

Winn Dixie

Saying there is a cleanup on "aisle four" is an understatement - instead of a single broken bottle of mayonnaise, it was more like a mess generated from of an entire shelf collapsing. Despite a better than expected second quarter report, the stock price reacted in a "helter skelter" fashion. When WINN released its results Wednesday after the market close, the initial news appeared favorable, and in premarket the following day, the shares were soaring, up as much as 18% touching a high of $13.50.

The company reported sales of $2.25 billion and a 5 cent loss before onetime gains. WINN beat earnings estimates by a penny and met revenue guidance, but after the market had a chance to really soak in and digest the quarter, all hell broke loose as the shares nosedived as much as 30% to touch an intraday low of $9.50. Apparently, a question during WINN's conference call regarding second half gross margin threw everyone for a loop, as the next day, the company felt compelled, through a press release, to clarify that a 28% gross profit margin is anticipated for the balance of the year. This release, coupled with an analyst upgrade, sent the shares up 5% in early trading, but then heavy selling pressure reared its ugly head, pushing the stock into "freefall mode", dropping it 17% from its intraday high of $10.69, to a new all time low of $8.86, before a 4% rally ensued, prompting an anemic close of $9.22.

Gross Margin expansion

The company's gross profit margin improved a hefty 140 basis points from 26.7 to 28.1%, primarily related to the company's paring down of holiday promotions and mark downs. WINN showed a .2% increase in same store sales, aided by a 2.8% bump in basket size offset by a 2.5% reduction in transaction count.

WINN's operating and administrative costs unfortunately went the wrong direction, spiking 110 basis points from 26.4% to 27.5% - management clearly needs to focus on getting these costs under control. The company saw increased expenditures of: $13.5 million in payroll costs, $ 4.6 million in depreciation and $4.9 million in utility costs. These costs were also skewed from lower self insurance reserve benefits, dropping from $15.5 million to $8.6 million.

Five different markets

The regional grocery chain caters to five distinct markets. They include: (1) Urban (2) Hispanic (3) Resort (4) Affluent (5) Kosher. WINN is doing extensive market research to take advantage of each of these niches, by providing its diverse customer base the products they desire at the right prices. This target market approach is good method to attract customer loyalty.

Store remodeling program

WINN has already remodeled 112 stores, who have achieved a first year sales lift of 9.6%. In the next six months, WINN plans on completing an additional 75 remodels, which will result in 33% of its locations remodeled. WINN indicated it is spending in the range of $1 million to $2 million per remodel, which could be too much. Personally, I would rather see them cut down on these capital expenditures and return the difference to shareholders through stock buybacks and cash dividends, but probably, this is 'wishful thinking'.

Private label booming

Consumers are looking for value, and are finding it in private labels. The company's private label program is advancing nicely - it was able to increase its penetration rate from 20.90% to 22.2%. The company has redesigned over 2000 private label products and expects to complete an additional 1000 redesigns by the end of 2009.

Analyst upgrade

FTN Midwest's upgrade was apparently too little too late. The upgrade wasn't exactly the strongest in the world - going from a sell to a hold, but at least it was positive. It is interesting to note, FTN's analyst, Alex Bisson, seemed to hone in on WINN's $550 million operating loss carry over, by inquiring during the CC, if there was a change of control in the company, would the acquirer be able to utilize these valuable "NOL's" to offset future income tax liability. Fortunately , the answer was yes, making WINN a more desirable target.

It is somewhat comical, half of the analysts on the conference call shared the same name. Karen Short, of Friedman Billings, is definitely not short the stock, as she and Karen Howland of Barclay's Capital both seemed "impressed" with the company's current progress and potential for a successful turnaround.

Bottom Line

I have no clue why the stock got so hammered. The company's second quarter was not that bad. I presume WINN's anemic sales growth spooked the very "fickle" street. This scenario just presents a better buying opportunity, as the shares are extremely oversold - dropping way too much, too quickly. The recent collapse in the share price not only presents a compelling buying opportunity, it brings the company up a few notches as an attractive acquisition candidate.

Comments

[John Bentley:]

As Peter said, "You do the math". Is that what caused the massive sell off? I'm not sure, but I have a gut felling there is more to it than that.

Feb 16 08:21 AM

[David Livin...:]

Do some more math. Market share is plummeting. Sales are not increasing faster than inflation and population growth. Competitors continue to open stores while Winn Dixie does minor remodels. Remodeled stores only get 9% lifts. This is terrible considering Winn Dixie probably is the lowest sales per sq ft supermarket chain in the country. Nine percent of nothing is nothing.

Competitors are targeting the few successful stores to build new stores nearby. The assumption is that if Winn Dixie is doing well, there is plenty to go around and it will be like taking candy from a baby. They view Winn Dixie as an ineffectual competitor that will not be able to respond defensively.

Feb 16 10:30 AM

[Watersisland:]

The problem is Winn Dixie is in dire need of Catastrophic Medical Care. It's mid and lower level mgr's are deaf,dumb and blind while its upper level management is obviously in a coma. In any stores that produce a healthier than market share profit I'm sure you will see that it is only because there is no competition in that immediate area and even where the market size has increased tremendously in areas where WD has no direct competition, their market share has not. During a period when most if not all other grocers have discontinued the requirement of a store ID type card to get a reasonable price on items, WD has continued it with the delusion that people think it is benefiting them. Their pricing is so confusing that it is corupt and their register receipts are equally as intentionally hard to decipher. Store management and associates are really nothing more than attandants with no capabilities of critical thinking skills and all seem to be oblivious to poorly,mismarked, and non marked pricing. Dept heads and workers have NO knowledge of the particular items they display. Sales on items that aren't on the shelves. The constant reorganization of the stores layout in the past decade makes finding any item a chalenge, especially if they even carry it anymore. Bait and switch is always one of their big games. While they sometimes have some reasonably priced items(less and less of late), it's not worth the aggreviation and effort in the long run.

Feb 23 07:00 PM

[WinnDixieBoi:]

Well I am an employee of Winn Dixie, and I want to first say that I believe winn dixie is trying their best but there several of problems in which Winn Dixie can solve. The main problem is that Winn Dixie invest in things that I dont find "beneficial" to the company. They also try to play the customer into thinking they are getting a good when in actuality, the buyer can get lower prices at Walmart of Food Giant. Winn Dixie also doesnt keep their employees i.e. cashiers, inform of changing events. In the end, only 112 Winn Dixie store will be left standing because of these problems

Mar 24 12:46 AM