Winn Dixie: Second Quarter Results Could Jump-Start the Stock

Jan.19.10 | About: Winn-Dixie Stores, (WINN)
Expectations are quite low (low expectations are good - easy to beat) for the South Eastern regional grocery store operator when it reports Fiscal 2010 second quarter earnings later this month. Analysts expect the company to produce a loss of 15 cents on sales of $2.18 billion (second quarter is an extended sales period).
There is a decent chance the grocery retailer could actually beat expectations (after all, SVU soundly beat estimates last week) since they were able to improve their first quarter gross profit margin 40 basis points from 27.9% to 28.3%, despite a dip in sales leverage.
Progress made: If WINN comes in with a 3% sales drop, and sequentially improves its gross profit margin by 10 basis points from 28.3% to 28.4%, as well as decrease its Selling, General& Administrative costs by 40 basis points (from 28.6% to 28.2%), the food purveyor could earn as much as 8 cents for the quarter.
In addition, WINN will be subject to no income tax liability for the period, since it has over $500 million of losses already on its books, for carryover purposes. This upside earnings surprise is achievable - assuming there are no additional store closing charges posted to the quarter.
Activist shareholder update; A large holder of shares has expressed his wish to have the company reduce its capital expenditures ( store remodels), and use its cash ( about $150 million) and line of credit ($500 million-they have no debt) to buy back up to 70% of its outstanding shares in the open market to enhance shareholder value. The strategy, according to George Schultze, of Schultze Asset Management fame, could provide the “winning” formula to propel the market value of the shares significantly higher in the short term.
We could see an analyst upgrade or two: Janney Montgomery Scott seems the most logical to raise their opinion, as their frequency of updates is more numerous, and they just downgraded the shares from “buy” to ”neutral“ last October. Another sell-side analyst, Karen Short, of BMO Capital Markets could also issue an upgrade from her current view of, “market perform” to “outperform”. She has shown a liking to the turnaround story, stating: “Winn Dixie continues navigating the challenging environment extremely well”.
Bottom line: this seems like a good earnings play stock. If they beat, the shares could see a 20% spike, if they miss, the downside risk is limited to no more than 5%, since the market probably has already “baked” in a dismal report into the current stock price. The risk reward scenario of this earnings play is certainly compelling.

Author's Disclosure: long WINN