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Winn-Dixie Stores, Inc. (NASDAQ:WINN)

F2Q10 Earnings Call

February 17, 2010 8:30 am ET

Executives

Sheila Reinken - Vice President of Finance and Treasurer

Peter Lynch - Chairman, CEO, and President

Bennett Nussbaum - Senior Vice President and Chief Financial Officer

Eric Harris - Director of Investor Relations

Analysts

John San Marco – Janney Montgomery Scott

Bakley Smith – Jefferies

Karen Short – BMO Capital

Alex Bisson – Northcoast Research

Chuck Cerankosky – Northcoast Research

Damian Witkowski – Gabelli

Operator

(Operator Instructions) Welcome to the Second Quarter Fiscal 2010 Winn-Dixie Stores Earnings Conference Call. I would now like to turn the call over to your host for today, Ms. Sheila Reinken, Vice President of Finance and Treasurer.

Sheila Reinken

Thank you for joining us to discuss Winn-Dixie's financial results for the second quarter of fiscal 2010. I’m Sheila Reinken, Vice President of Finance and Treasurer. Joining me this morning are Peter Lynch, Chairman, CEO, and President, Bennett Nussbaum, Senior Vice President and Chief Financial Officer, and Eric Harris, Director of Investor Relations.

Before we begin, let me remind you that the information presented and discussed today includes forward looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The risks and uncertainties related to such statements are detailed in our SEC filings.

Today’s call will include a discussion of adjusted EBITDA, which is a non-GAAP financial measure. A reconciliation of adjusted EBITDA to GAAP financial measures can be found in the schedules of the press release we issued yesterday. It’s available on the Investor Relations section of our website, www.WinnDixie.com.

Today’s call is being recorded and a transcript will be archived. A replay of the call will also be available on the Investor Relations section of our website later today. As usual, Peter and Bennett will begin with some prepared remarks and afterward we will open up the call for your questions.

Now let me turn the call over to Peter Lynch.

Peter Lynch

As you’ve seen from our press release, the difficult operating conditions we discussed last October continued to affect our results in the second quarter. Despite strong margins, our sales and adjusted EBITDA came in below the second quarter of last year. For the quarter, adjusted EBITDA was $30.5 million compared to $35.5 million for the second quarter of fiscal 2009. For the first half of fiscal 2010 adjusted EBITDA was $53.3 million compared to $62.5 million in the year ago period.

When making comparisons you should note that adjusted EBITDA in the second quarter of fiscal 2009 included an estimate benefit of $1.7 million due to storm related sales, and the first half of fiscal 2009 included an estimate benefit of $4.4 million.

Identical store sales declined by approximately 2.9% for the quarter driven by a decrease in basket size of 1.1% and a decrease in transaction count of 1.8%. The decline in ID sales was attributable to a number of factors. First, the steep recession, high unemployment, and declining home values across many of our markets are continuing to make consumer very cautious with their overall spending. As we discussed last quarter we’re continuing to see consumers reduce their overall purchases, trade down to lower priced items, particularly at the end of the month.

I think it should be noted that during our second quarter we had four holidays; Halloween, Thanksgiving, Christmas and New Years. The three holidays that fell at the end of the month, Halloween, Thanksgiving and Christmas were sales challenged in transaction and basket. New Years, however, which falls at the beginning of the month, produced much better sales trends and was positive in the basket, only slightly negative in transactions.

Deflation also continued to affect sales growth negatively this quarter, with price declines across many categories such as meat and produce. Although we saw the deflation slightly moderate toward the end of the quarter from 80 basis points in quarter two to 10 basis points in the first six weeks of quarter three. Despite the pressure on the top line we are pleased that we have been able to hold the line item margins.

During the second quarter, gross margin was 10 basis points higher than last year, this was due primarily to lower LIFO charge, partially offset by a slightly higher shrink and warehousing costs. Although consumer food budgets continue to be strained, we are committed to remaining disciplined with our respect to our promotional offerings and maintaining a strategic and measured response to our competition. We will continue to offer products and promotions that are tailored to meet the needs of our customers.

As I’ve said so many times, we are interested in profitable sales and will not over promote in a down market. While we will remain very competitive we do not want to encourage the sort of unsustainable programs that drive lower margins and do not build our brand for long term customer loyalty.

Now I’ll turn to our store remodel program. The conditions that impact the sales across the chain were also evident at the remodels. We were only able to generate a modest increase in basket size at the first year offensive remodels during the quarter and as a result the rate of improvement to sales decelerated on a sequential basis, our year one offensive remodels had a 4.9% weighted average sales increase excluding the grand re-opening phase.

Although we are not pleased that sales growth slowed in the quarter, it is important to note that the offensive remodels are still continuing to generate year over year improvements in gross profit dollars and they continue to outperform the rest of the chain and transaction count is up 4.1% compared to the year ago period which is a clear indication that customers are continuing to respond positively to the changes we are making.

While we expect the sales environment will remain challenging for some time, I can assure you that we’re not simply waiting for the economy to rebound. We are doing everything in our power to improve our results, we are closely monitoring shifts in consumer behavior, and adapting the marketing and merchandising at our remodels and across the chains to drive sales.

One example of our efforts is our new Fuel Perks program which allows customers to earn gas discounts at Shell branded and other participating gas stations every time they shop in any of the 51 Winn-Dixie stores in the Jacksonville area. Fuel Perks affords our customers tremendous value and helps stretch their paychecks just a little further during these difficult economic times. We are confident that programs such as this will help us drive increased sales or at least mitigate the effects of the economic environment.

Over the long term we continue to believe that improving the condition of our stores is the key to our future success. We must have a clean attractive environment to offer our customers. The fresh and local shopping experience that will allow us to compete effectively and drive increased sales as the economy recovers. I am extremely confident that this is the right strategy for the company and investing in our store base is the most appropriate use of our capital to drive shareholder value over the longer term.

Given the current economic environment we’ve gone back and taken a hard look at our remodel plans for the remainder of fiscal 2010. In choosing which stores to remodel we conduct a careful analysis and many factors including the capital required, the potential for sales lift in one location versus another, and how various options will affect our brand image. This analysis is done with and eye towards optimizing the return on our investment and preserving liquidity.

For fiscal 2010 we plan to remodel a total of 60 stores, 27 of which have already been completed. While this is 15 fewer than we had originally targeted we believe it is an appropriate number given the difficult environment. In picking the 60 stores we have chosen to remodel this year, we’ll be concentrating our resources in those markets that are faring better in the economic downturn and away from markets that have been particularly hard hit and therefore offer less potential at this time for sales lift.

I wanted to also mention that we just successfully opened the doors on our first newly constructed location since 2004. This brand new state of the art facility is located in Covington, Louisiana, just north of New Orleans. This showcases our latest design concepts and a sleek and modern 55,000 square foot best in class supermarket.

We followed the highest environmental standards in designing and equipping the store and as a result we are the first grocery store in all of Louisiana and only the 26th in the entire nation to be awarded the Green Chill Certification from the Environmental Protection Agency. This is something we can be very proud of because it demonstrates our commitment as a company to doing the right things for our customers and our communities.

As Bennett will discuss in a moment, we are taking steps to trim our capital spending by about $20 million as compared to our annual plan by doing fewer remodels and reducing certain other planned expenses. We believe this is appropriate given the environment and balances our desire to be prudent with our expenditures in the near term while still executing the strategic initiatives that will enable us to compete effectively when the economic conditions improve.

Finally, before turning to our guidance, I should also mention that we’re already in the planning stages of our capital program for fiscal 2011. We are analyzing how we may adjust the remodel program going forward. This includes determining the number of stores, which markets would be most effective and the appropriate level of capital spend per store. As we move forward we intend to be very prudent with the use of our capital with an eye towards making investments that will drive top line sales.

Now before turning the call over to Bennett, I will review our outlook for the remainder of fiscal 2010. While we expect tough economic conditions to persist through the rest of our fiscal year, the second half is traditionally stronger for Winn-Dixie due to the seasonal trends. We believe our current guidance of $140 to $160 million and adjusted EBITDA is achievable for fiscal 2010 although we now think it is more likely that we’ll be at the lower end of this range.

Our guidance reflects our expectation that deflation will moderate this quarter and modest inflation will return in the fourth quarter. Our guidance also factors in our expectation that the competitive environment will remain promotional but rational as it has been so far. Of course we’ll continue to monitor the pricing very closely as we move through the rest of the year, but as I mentioned, we will always respond strategically and we will not over invest and price simply to chase sales.

In summary, we expect economic conditions to remain difficult and to continue to put pressure on sales in the second half. However, we do believe we can continue to deliver on the bottom line through a combination of merchandising, to meet the shopping needs of our customers, strategic use of our promotional pricing, and prudent cost control.

As we navigate this downturn we’ll continue to execute our strategic initiatives to help us achieve sales growth over the longer term and we will remain very focused on the areas that we can control. I continue to have a high level of confidence in our strategy and in the team and I believe we are positioning the company for sustainable long term growth when the market conditions improve.

With that I’ll turn it over to Bennett to review the financial results in more detail.

Bennett Nussbaum

Before we open the call up for Q&A I’ll briefly run through a few key items for the quarter. I’ll begin with other operating and administrative expenses. The company’s other operating and administrative expenses for the second quarter were approximately $611 million a decrease of $9.3 million compared to the same period last year. Year to date, other operating and administrative expenses decreased by $8.3 million compared to the same period in the prior fiscal year. The $9.3 million decrease during the quarter is due primarily to lower payroll and rent expenses and utility costs.

As we noted last quarter, we are always mindful of ways in which we can mitigate costs and we are especially cognizant of maintaining a tight control of our operating expenses in the current economy. Currently our O&A expenses on a per store basis are at the lower end of the industry and we expect O&A in fiscal 2010 to be lower than last year after excluding depreciation, amortization and share based compensation which are non-cash items.

We are closely monitoring every line on the P&L and have determined several areas where we can better control our costs. We are actively engaged in reducing expenses in supply chain, compensation, retail energy costs, logistics and manufacturing, and advertising costs among others. We will continue to make strategic but controlled reductions of expenses that will not hinder our ability to execute our strategic initiatives.

Moving on to EPS, for the second quarter of fiscal 2010 the company reported net income of $2.1 million or $0.04 per diluted share compared to net income of $16.1 million or $0.30 per diluted share in the second quarter of fiscal 2009. When making year over year comparisons it’s important to note that net income for the second quarter of last year included a gain of $22.4 million which was $13.8 million net of tax or $0.25 per diluted share and was related to the resolution of the company’s insurance claims from hurricanes that occurred in fiscal 2006. Excluding this item, EPS would have been roughly flat with the same period last year.

Additionally, net income in the second quarter of fiscal 2010 included impairment charge of about $1.1 million, roughly $400,000 of the impairment charge was related to one store remodel, with the remaining $700,000 related to five previously impaired locations.

Moving on to CapEx and liquidity, as of the end of the second quarter, Winn-Dixie had approximately $662.8 million of liquidity comprised of $508.5 million of borrowing availability under our credit agreement and $154.3 million of cash and cash equivalents. We expect capital expenditures for fiscal 2010 to be approximately $200 million a $20 million decrease from our prior expectation. The reductions are expected to come from doing fewer remodels as well as lower expenditures in other areas. We currently have no borrowings under our credit facility; we do not anticipate having any borrowings under our credit facility for fiscal 2010.

Now let me hand it back to Peter.

Peter Lynch

As we’ve discussed, this is clearly a tough environment for both Winn-Dixie and other food retailers. Many of the challenges we face our outside our control and they continue for some time. However, we are addressing those areas that we can control and I am confident in our ability to get through this period, deliver on the bottom line, and continue executing the strategic initiatives that will enable us to compete effectively over the long term.

I think we’re now ready for our Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John San Marco – Janney Montgomery Scott

John San Marco – Janney Montgomery Scott

If you could talk about your market share performance in the context of the comp getting substantially worse sequentially.

Peter Lynch

I think the last market share reports that came out we saw some erosion in a few of our markets. Quite frankly, I’ve said this before, we’re not going to over promote to get cherry pickers back into our store. Those are non-sustainable customers. I think what we’ve done is be very, very prudent to make sure that we get loyal customers that are going to be with us for the long term. Do we expect a little bit of erosion? Yes we do. Those are customers that quite frankly don’t help us on the bottom line. That would just chew us our margins going after them.

I think our strategy is right, in fact quite frankly, I’m starting to see a bunch of the other retailers on their earnings report kind of reflect the direction that we’ve taken. We’ve spoken about this for about the last year and a half and now others, I think I saw that in Whole Foods report yesterday, they’re not going to go after those cherry pickers; they’re going to go after the customers that will drive their brands and drive their brand for a very profitable future.

John San Marco – Janney Montgomery Scott

When you budget for these remodels, is part of your assumption that remodeling a store will help you to take market share? In short, do you require market share gains in aggregate in order for these remodels to make sense for you economically?

Peter Lynch

Obviously when we do the remodels we expect to increase our market share, that’s clearly indicated when you see the transaction counts up in these stores. We take that into account, its happening, which is a big, big plus, and you see that reflected in the transaction counts in our remodeled stores.

Operator

Your next question comes from Bakley Smith – Jefferies

Bakley Smith – Jefferies

I wanted to ask about more current climate as you head into the travel season, or as we’re in the middle of travel season in Florida and other areas. Are you seeing tentative signs of any pick up in just people picking up higher end items, more seasonal, is there anything that we could go on that suggests some change in consumer behavior?

Peter Lynch

I think the one thing that we have seen is in the affluent stores, a more return to normalcy. I think those stores a year ago, a year and a half ago; those consumers were clearly affected by the downturn in the stock market. With their numbers returning pretty much back to where they were, the affluent stores are returning to more normalcy. Its the ones outside of that that still have some challenges, whether it be an urban market, etc. where you get some high unemployment and you’ve got some housing issues out there. We’re starting to see some bright lights is the way I’d answer that, in some of the markets.

Bakley Smith – Jefferies

You mentioned the check flow, has that become any more pronounced over the last, I suppose it has become more pronounced over the last six months but is there any color there with the last couple check cycles?

Peter Lynch

I guess you’re referring to the food stamps cycle?

Bakley Smith – Jefferies

Food stamps and first of the month, the general check cycle.

Peter Lynch

What we’re seeing on that one, the amount of food stamps in our stores has increased over the last year or so. The amount of people on some type of support is greater than it was before. We clearly see that the beginning of the month is fairly good for us but the ending of the month is more challenging because either the food stamps are running out, or they’re out of cash. Two years ago we always talked about the last week of the month being the challenge, now I think for many of us that last week has grown into the last two weeks becomes a challenge. You clearly see in challenged areas the last couple of weeks; they’re either out of food stamps or maybe running out of cash.

Bakley Smith – Jefferies

Do you see any opportunity there with promotional activity timed for that or is there any way to make that lemon into lemonade?

Peter Lynch

We’re trying to do that. One example would be our Fuel Perks program that we introduced in Jacksonville during the quarter. Clearly that gives that consumer that’s challenged with how they’re going to spend that dollar a chance to spend it in our store and also get a discount at the gas pump. The more they spend the more they get as a discount. We’ve seen a number of customers coming back to us saying, Wow! I saved $0.50 off a gallon, or $1.00 off a gallon. Gas drives behavior in a big, big way so that’s one way.

We’re doing some other promotions called “Make a Meal” where we can stretch their dollar for them. Clearly we try to focus promotions on the different weeks of the month depending upon where the money is and it seems to be working fairly well.

Operator

Your next question comes from Karen Short – BMO Capital

Karen Short – BMO Capital

I’m wondering if we could dig into sales a little bit more, if you said this I didn’t catch it. Could you maybe discuss the cadence of sales throughout the second quarter and then give us some color on what you’re seeing into the third quarter? It sounds like deflation is less of a headwind into the third quarter so it must have improved.

Peter Lynch

I think the big headline there is we’ve see deflation decelerate which is good. It’s early into the third quarter for us because we’re just about one day shy of six weeks into it. Clearly our trend so far this quarter on sales is better than last quarter. Its only six weeks, it’s too early to tell but we like the trend so far.

Karen Short – BMO Capital

Moving to the remodels, do you think CapEx seem to make sense, but it also seems that if I do the math on your remodels that you’re actually increasing the dollars per remodel? If you were originally $1.73 million per store you’re now up to $2 million a store. I was wondering if we could talk a little bit about that.

Peter Lynch

When we originally did our plan for this year I introduced the concept that we were going to be doing minor remodels, mixed in with the majors. A minor remodel might only be $1 million spend, however probably only generate maybe half of the sales increase that a major would. It had the benefit of taking down the CapEx per stores; however, it also took down the sales that would drive on the new remodels. As we looked into the environment that we’re in this year we didn’t think that those minors would drive the sales opportunity that we saw out there so we diverted those funds into the major ones and that’s kind of that change.

I will also say, from time to time we’re finding some stores where we want to invest more than $2 million. Either there’s an expansion opportunity or there’s just so much work we can go in a very, very affluent area that will give us a great opportunity to compete against our competitors. There’s a little bit of that in there.

For example, we’ve just found that putting in a cheese department in some of our affluent stores has been a big benefit to us. That’s not a whole lot of dollars but it might be another $100,000 in a remodel. We know that that’s going to generate incremental sales and really contribute to the bottom line because as you know, that cheese department is extremely profitable with the margins that we have.

We changed the mix from minors to majors and a couple of the stores we also added some incremental CapEx dollars too just because we know to drive the top line and bottom line.

Karen Short – BMO Capital

I’m curious, in terms of vendor support it seems like the payables to inventory ratio has been kind of increasing quite a bit sequentially from going back to the first quarter of last year. Can you elaborate on anything on that am I right?

Bennett Nussbaum

You’re absolutely right; we continue to work with our vendor partners to improve our terms across the board. We just keep cranking it up a little more and a little more every quarter and we’ve had some successes with our vendor partners. The answer to your question is yes, you’re right.

Peter Lynch

This has been an internal project that Bennett drove. Every single quarter the whole team comes in and meets with me to show me their goals, they talk about their progress. I’ve got to tell you, the group has done a great, great job of durability to make a lot of positive movement in this area, and we feel good about it. Again, it’s about transparency, focus and good leadership.

Karen Short – BMO Capital

How much more upside is there on that because you’re still below some of your larger peers on that ratio obviously. Where do you think that can go?

Bennett Nussbaum

We think we can still continue to expand it. One of the reasons we’re below some of our peers is our turns per store, our sales per square foot are lower, so your store inventories are a little higher. Nevertheless we made some great progress last quarter; we see some good progress this quarter. It’s something we just stay with.

Karen Short – BMO Capital

What was going on with shrink in the quarter, you commented on that.

Peter Lynch

We started off the beginning of the quarter with shrink being a little bit high. Quite frankly, as you look at it, I think a year ago inflation probably hid some of the shrink and we didn’t have that benefit this year. It went up a couple of clicks the very beginning the quarter but we’ve got it under control and I think it’s normalized right now for the remainder of the year.

Karen Short – BMO Capital

I’m curious, I know you’ve been hearing this from shareholders but given your cash balance as well as some of the restrictions you have on your ability to buy back shares, will you consider other uses of capital, like would you consider a dividend or would you consider making smaller acquisitions as a way to increase your market share? Can you talk about that a little bit?

Peter Lynch

It was one shareholder we heard from. We’ve had the opportunity to sit and discuss his viewpoint at length. We’ve had an opportunity to discuss it with the Board at length and quite frankly we are convinced that our strategy, investing in the stores is the right long term strategy for our shareholders and for the economic growth of this company.

As far as other things, we are open to entertaining anything at any point in time. Obviously if there were some small acquisitions that would help us with market share and drive the top and bottom lines, at the right price we’d be interested. We’re always looking, but again I think we’re very much convinced that our original strategy of remodeling these stores for the long term growth of the company is the right one.

Operator

Your next question comes from Alex Bisson – Northcoast Research

Alex Bisson – Northcoast Research

On the traffic trend that you reported in the quarter, sequentially it dipped a little bit. I’m wondering if you can talk a little bit around that. Also, what your loyalty card is telling you about that trend, are you outright losing some customers or is it customers shopping a little bit less frequently?

Peter Lynch

Regarding the traffic, we clearly see some decreases at the end of the month, also I was trying to indicate to you guys with the holiday comments, those are times when typically you get a lot of traffic increase but this year with the holidays being at the end of the month for both Halloween, Thanksgiving and Christmas, we saw traffic decline. End of the month was affecting our holidays and affects us on a weekly basis.

As far as what we see when we look at the numbers and look at the loyalty cards, what we’re seeing is when we lose the traffic it’s predominantly from cherry pickers. Again, as I indicated before, that’s not a shopper you want to have for the long term, it’s very expensive to maintain and quite frankly is not going to help you with your branding efforts going forward. I think we know exactly when we’re losing them, I think we know who we’re losing, and we’re focusing our promotional activities so that we can drive the appropriate sales to drive profitable sales.

Alex Bisson – Northcoast Research

On the call here you suggested that the comp softness or the sequential softness was broad based but you also suggested that you’re going to reconsider where you’re putting CapEx dollars. Given those two things, is the reconsideration towards specific stores and markets or do you think the capital is going to migrate away from certain markets in favor of others?

Peter Lynch

Although we have an overall sales challenge out there, I think what I did indicate by talking about the affluent markets that there was more of an upside there on sales and more of a rationalization in those environments today. The one thing we have is very good transparency with our stores and into our markets so as we take a hard look at which stores we’re going to remodel, we consider a lot of factors but I think we understand which markets will probably be more favorable in this environment to invest those monies in and get a better return.

Alex Bisson – Northcoast Research

Given that you did reduce the goal for this year of the number of remodels you want to complete, should that suggest that your footprint may also change over time as leases come due?

Peter Lynch

I wouldn’t read anything into that. That was a one time event obviously for this year. We’re not planning process for next year, we’ll take into the same considerations; the economy, which markets are doing well, which types of our remodels are doing better than others. I think its fluid right now. I wouldn’t read anything into that other than we’re being very prudent with our CapEx dollars and how we spend them.

Operator

Your next question comes from Chuck Cerankosky – Northcoast Research

Chuck Cerankosky – Northcoast Research

I wanted to ask about the gas program, given your experience thus far in Jacksonville do you look at expanding it to other Winn-Dixie markets.

Peter Lynch

So far, through just the initial stages of this thing, we’re excited about where we think it’s going to take us. We have seen sales lift, it’s not quite where we want to get it too yet but it’s early on. We really do a lot of customer surveys and what we’re hearing the customer say is this is exciting. I’ve got to personally tell you there’s not a lot of things that drive me on where I go to get my gas but I went out one day and although I do a lot of shopping at Winn-Dixie, I saved almost $2.00 on a gallon of gas, that makes your head turn. We think we’ve got something here that’s a winner and we’ll evaluate a little bit longer in Jacksonville but quite frankly we think it’s an opportunity to move this to other regions of our company.

Operator

Your next question comes from Damian Witkowski – Gabelli

Damian Witkowski – Gabelli

On the competitive landscape, I agree with your comment that I’ve heard from more than just Whole Foods, other, both regional and national chains have said they’re done chasing unprofitable business. I’m curious, where do you think the cherry pickers, as you call them, are going in your regions? Is it other small mom and pops or who’s being really irrational in this environment?

Peter Lynch

You saw the same thing that I saw on the Whole Foods announcement, I think you heard a little bit talked SuperValu, I’m starting to hear others out there that just chasing those unprofitable sales is not the prudent thing to be doing. Where do they go, obviously they look at every single newspaper ad and looking for who’s got the cheapest Coke or the cheapest Pepsi and they gravitate that way. Those are their habits and it just depends who’s got the ad that had the items that excite them.

Obviously they’re still coming to our stores because we’ve got great values every single week. We’re not going to drive some of those hard driving items that cherry pickers traditionally go after or quite frankly some of the mom and pops come up and buy the Coke and Pepsi in our stores because they can get it cheaper than they get it from their distributors. We think that’s a function that we don’t want to be involved in for the future.

We think that driving profitable sales is the way to go and balancing out our balance between the sales that we need and the profits that we need so we can operate very, very efficient and stores that provide the service and the quality the consumers want. That’s what you can’t lose sight of. Not every customer is looking for price, there’s always going to be lots of them that want to go to the Wal-Mart’s of the world etc. but there are a lot of customers out there that are looking for quality and service.

We just opened up our store in Covington, Louisiana and I can’t tell you, and I was in that store, I’ve been in and out three days, a number of hours every day, talked to a lot of consumers. They’re looking for more than just price, they’re looking for quality, they’re looking for service, and they’re looking for a way to prepare their family meals. Our strategy at Covington was exactly what our companywide strategy is and that’s to focus on fresh and local. We opened up that store with a farmers market on the outside so when the customer came to that store they were overwhelmed with produce and great service on the outside, quite frankly bought a lot of produce even before they got into the store.

Their comments were, Wow! This store is fresh. As they got into the store and as I talked to them throughout, they commented about all the local items we have and the New Orleans having local items is very important. I think we are hitting stride on fresh and local, consumers are recognizing it. I’ve always said that’s the market that we’re looking for, we’re out there to make sure we get the freshest products, we’re locally driven with either our promotions or our products and our people. We think that’s a sweet spot, we’re going to continue down that road.

Damian Witkowski – Gabelli

How many of your total stores would you say are in the affluent category?

Peter Lynch

Off the top of my head I’d just be guessing but probably easily a third.

Damian Witkowski – Gabelli

Are you seeing both traffic and basket size improve whether it’s positive or not, improving on a year over year basis?

Peter Lynch

We haven’t talked about by demographics how these things are going. What I have said overall is those stores are performing better than some of the others.

Damian Witkowski – Gabelli

What’s happening with private label penetration and are you changing anything with your vendors in terms of number of skus and vendors inside the store?

Peter Lynch

Last year we had a tremendous year on private label, we made gains as many of our competitors did. This year’s been a little bit more challenging because I think the major manufacturers have responded with better promotions on their products. Having said that, I think we’re up 10 basis points this quarter over last quarter this year. I think we’re just about flat or maybe slightly under same quarter year ago.

We managed to maintain or slightly ahead of last quarter. We’ve continued to see this as a very vibrant offering for us in our stores, particularly as people are challenged with the pocketbook at the end of the month. We’ll continue to press private label, but we don’t see the same increases this year that we saw last year.

Operator

Your next question comes from Karen Short – BMO Capital

Karen Short – BMO Capital

What is your private label penetration now?

Bennett Nussbaum

On the top of my head I think its 22.6%.

Karen Short – BMO Capital

As a percent of sales or units?

Bennett Nussbaum

Sales.

Karen Short – BMO Capital

I was wondering you also talked about your store level expenses, I think you said in the year Q that payroll was down $4.2 million. Can you maybe elaborate a bit on that, are you taking labor out of the stores, is there any backlash from it, and is it noticeable?

Peter Lynch

One of the principals that we’ve stood on since I’ve gotten here is to make sure we’ve got the right amount of labor in our stores. We’re not going to cut back on that. If we’ve cut back it is because we’ve got a labor scheduling program and if our sales in a store were $300,000 a year ago and are $290,000 this year then that $10,000 there’s a ratio there on labor. You cut it appropriately but you still have the same service levels in the store. If we cut its only because sales are down but we still maintain the same levels of service in our stores.

Karen Short – BMO Capital

What is the timing of your remodels for the rest of the year? How many are you going to complete in the third and fourth?

Peter Lynch

Minimal in the third, majority of them are in the fourth.

Karen Short – BMO Capital

Minimal as in less than 10?

Peter Lynch

Probably around eight to 10.

Operator

At this time there are no further questions. I would like to turn the call over to Mr. Peter Lynch for closing remarks.

Peter Lynch

Again, I’d like to thank all of you for joining us this morning. We do have a lot of challenges out there but I think the team is very well equipped to take those on. I appreciate your support and hope to see you in the stores.

Operator

Thank you for joining today’s conference. This concludes the presentation. You may now disconnect.

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