Eric Harris - Director of Investor Relations
Peter Lynch - Chairman, CEO, and President
Bennett Nussbaum - Senior Vice President and Chief Financial Officer
Dan Portnoy - Senior Vice President and Chief Merchandising and Marketing Officer
Scott Mushkin – Jefferies & Company
Alex Bisson - Northcoast Research
Meredith Adler – Barclays Capital
Susan Anderson - Citigroup
Glenn Gawronski - JP Morgan
Andrew Wolf - BB&T Capital Markets
Karen Short – BMO Capital
Winn-Dixie Stores (WINN) Q4 2010 Earnings Call August 31, 2010 8:30 AM ET
Good day ladies and gentlemen and welcome to the fourth quarter 2010 Winn-Dixie Stores earnings conference call. [Operator instructions.] I would now like to turn the conference over to Eric Harris, director of investor relations. Please proceed.
Good morning and thank you for joining us to discuss Winn-Dixie's financial results for the fourth quarter of fiscal 2010. Joining me this morning are Peter Lynch, chairman, CEO, and president; and Bennett Nussbaum, senior vice president and chief financial officer; and Dan Portnoy, senior vice president and chief merchandising and marketing officer.
Before we begin, I 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 also 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 schedule of our press release we issued yesterday, which is available on the Investor Relations section of our website at www.Winn-Dixie.com. Today’s call is being recorded and a transcript will be archived. A replay of the call will be available for replay on the Investor Relations section of our website later today. I will also be available after today’s call for additional questions.
Finally, let me also remind you that 2010 fiscal year was a period comprised of 53 weeks, whereas fiscal 2009 was a 52-week period. The extra week, which took place in the fourth quarter, affects all year-over-year comparisons, so please keep that in mind as we go through our discussion.
As usual, Peter and Bennett will begin with some prepared remarks, and afterward we will open the call up for your questions.
And now, let me turn it over to Peter Lynch.
Thanks Eric. Good morning everyone, and thank you for joining us to discuss our fourth quarter and year-end results for fiscal 2010. As you saw from the press release we issued yesterday, identical sales in the fourth quarter decreased by approximately 5.2%, driven by a decrease in transaction count of 4.2%, and a decline in basket size of 1%.
Clearly, we are operating in a very difficult economic and competitive environment, one of the toughest I've seen in my career. Prolonged recession, coupled with intensifying competition and price-sensitive consumers is putting significant pressure on our top line.
As conditions became more promotional in the fourth quarter, our sales began to deteriorate. We made the decision not to respond with the same promotional offerings as our competitors in order to preserve our profitability. We held the line on margins, and met our guidance through effective management of promotional activity and cost control.
However, this action cost us sales. I want you to know that no matter how tough the environment, this type of sales decline is not acceptable to us, and we have already implemented several adjustments to our promotional practices in order to grow sales. While these adjustments will negatively impact our profitability in the first quarter, we believe they are necessary in order to improve our top line results and recapture market share.
In the first 8 weeks of fiscal 2011, they have helped us generate a sequential improvement in our id sales of 200 basis points from the fourth quarter of fiscal 2010. In addition, we believe the improvement would even be higher were it not for the impact of the Gulf oil spill. While only about 15 of our stores have been affected, we believe right now the oil spill may cost us about 50 basis points of sales in the first quarter.
The good news is we expect the impact of the spill to lessen as we move forward throughout the year.
The bottom line is, we still have a lot of work to do, but the current sales trend has significantly improved compared to the fourth quarter. We also have additional sales initiatives we are implementing in fiscal 2011 to build on the improvement so far in the first quarter.
I can't talk about all of them for competitive reasons, but one example is our expanded fuelperks customer incentive program, which continues to generate positive responses and is a great opportunity to drive incremental sales. Another is a new computer generated order program, CGO, that will drive sales by reducing out of stock items and lowering inventory in the stores over time. The program helps streamline the ordering system and has proven to be very useful in helping us meet the specific needs of each store.
We are currently rolling out the program across the entire chain and expect it to be completed by the end of the year. As we move throughout the year, we will continue to implement these and other initiatives to further improve current sales trends. I am firmly committed to making whatever adjustments are necessary to position us to achieve sustainable and profitable sales growth over the longer term.
With that as a backdrop, let me turn to our store base. We continually evaluate our performance on a store-by-store basis, and as you would expect, in times like these we have taken a very tough look at our footprint. As you saw from our store closure announcements in July, we are taking actions to ensure that we have the best possible base of stores from which to compete.
None of the stores we are closing have been remodeled, and while we had hoped the performance might improve enough to warrant capital investment, that did not occur. These stores simply had not been performing up to our standards, and we saw little prospect of them doing so in the future. We also reduced our work force in the field, and corporate support levels to reflect these closures.
Although this was not a decision that we took lightly, we feel that these changes were necessary to make Winn-Dixie a stronger company. Exiting these locations will enable us to lower our cost structure, improve efficiency, and build the right foundation for our business now, and in the future.
And now let me provide you with an update on our store remodeling program. As you saw from our press release, we decided it would be appropriate to include additional information on the results of the program now that we have remodeled about half of our stores. I'd like to spend a few minutes this morning sharing my perspective on the progress of the program thus far, and where we think it is headed in fiscal 2011 and beyond.
As you know, the remodeling program is a central part of our longer term plan to give our customers a vastly different, and much improved, shopping experience that is built around two themes: fresh, and local. As part of that strategy, we not only provide our shoppers with improved physical locations, better customer service, and we have five different store clusters that fit each particular neighborhood and cater to the needs of the customers in those areas.
The changes we have made continue to draw positive results from our customers and they are an essential part of restoring our brand and competing more successfully over the longer term. Since the inception of the program in fiscal 2007 we have completed a total of 230 remodels, or about half of the base.
Two hundred of those stores are included in the financial data we are discussing today because they have already finished the grand reopening phase. Of those 200 stores, 159 were offensive remodels, and 41 were defensive.
Since the program's inception, our 159 remodels have generated a weighted average sales increase of 7% on a cumulative basis since their grand reopening, which includes an increase in transaction count of 3% and an increase in basket size of 3.9%.
Our 41 defensive stores have generated a weighted average sales decrease of 5.6% on a cumulative basis. However, when you adjust for the impact of new competition, we estimate that those stores have generated a weighted average sales increase of 4.5% on a cumulative basis.
In total, our 200 remodeled stores have generated a weighted average sales increase of 4%, 6.4% when adjusted for competitive impact on our defensive remodels. Also in our press release is an analysis on return on investment capital, which is a measure we use to evaluate the overall profitability of the store remodeling program, the effectiveness of the capital deployed, and the future allocation of capital.
Since the inception of the program, the offensive remodels have generated a return of 16.3%. When adjusted for competition, the defensive remodels have generated a return of 11.4%, and in total, the company's remodel program has generated a return of 11.3% or 15.2% when adjusted for competition on the defensive remodels.
Now let me take a moment to discuss our future remodel plans. As you know, we analyze the capital investment required for each store remodel on a case by case basis. And while we have averaged about $2 million per store so far, the actual amount spent at each store can vary greatly depending on a range of factors including the store's condition, square footage, market location, and improvements that have been required.
We take a hard look at each store, with an eye towards how best to improve the brand and realize return on our investment over the longer term. We also continue to learn from each investment, and incorporate advanced ideas into each successive design.
Most recently, we opened two stores, one in Covington, Louisiana and the other in Margate, Florida. We are very excited about these stores, which are state of the art facilities that showcase our latest design concepts in a sleek and modern supermarket. The Covington and Margate stores incorporate elements of the company's tradition remodels, but offer a superior shopping experience with expanded, upscale, fresh departments including quality produce, deli, meat, and seafood, as well as other important attributes.
While these two stores are larger and more costly to construct than the remodels we have conducted historically, we believe they offer the potential for higher returns and will significantly enhance our ability to attract new customers, which is a critical part of our ability to drive long-term sales growth. As a result we have decided to use the Covington and Margate format for most of our fiscal 2011 remodels.
These stores will be located in areas that offer similar characteristics and shopper demographics as Covington and Margate, and which are expected to have a positive impact on the company's brand image, transaction count, sales, and profitability throughout the markets in which they are located. In total, we plan to remodel 22 stores in fiscal 2011 at a cost of approximately $80 million. Of these, we expect 17 to be similar to Covington and Margate formats.
Before I turn the call over to Bennett, I wanted to comment on our guidance for fiscal 2011. As you saw in our press release, we expect to adjust EBITDA for fiscal 2011 to be in the range of $100 million to $130 million. This is based on our assumption that id sales for fiscal 2011 will be slightly negative to slightly positive.
We also expect gross margin to be approximately 28.2% and cash O&A to be lower than last year. Cash O&A excludes depreciation and amortization, the impact of potential self-insurance reserve benefits, and share-based compensation.
Our guidance reflects the significant challenges we are facing in our business. We expect our gross margin to decline by 30 basis points as we adapt our promotional activity in select categories to improve our sales. Additionally, we expect to see an increase in retail cost inflation similar to the trends we saw in the fourth quarter. As a result, we expect gross margin to be negatively impacted by 10 basis points due to cost inflation in milk and meat, which we currently cannot pass through.
As we move through the rest of the quarter and fiscal year, our top priority will be to drive higher sales through new initiatives and adjustments in our promotional practices. As we make these necessary adjustments however, we will remain strategic and measured in our approach as always. As I mentioned earlier, conditions are challenging. However, we know the steps we need to take. I am confident we can improve our sales while achieving the levels of profitability that we have put forth in our guidance.
Turning to our expectations for adjusted EBITDA, despite the improvements in sales so far this quarter, we expect that we will not generate adjusted EBITDA in the first quarter of fiscal 2011. That said, we expect adjusted EBITDA to improve during the remainder of the fiscal year based on sequential improvements in id store sales and the benefit of savings related to our previously announced store closures, and headcount reductions which will begin to be realized in the second quarter.
With that, I'll turn it over to Bennett to review financial results in more detail. Bennett?
Thank you Peter, and good morning everyone. Before we open the call up for Q&A, I'll briefly run through a few key items for the quarter. As a reminder, the fourth quarter of fiscal 2010 consisted of an extra week than fiscal 2009, so that should be noted when making all year-over-year comparisons.
I'll begin with other operating and administrative expenses. Other operating and administrative expenses for the 13-week fourth quarter of fiscal 2010 were $493 million, which is an increase of $15.2 million compared to the 12-week fourth quarter of fiscal 2009. The increase was due primarily to an extra week of payroll and utilities. Where the 53 weeks of fiscal 2010, other operating and administrative expenses were $2 billion, which is a decrease of $3.3 million compared to the 52 weeks of 2009.
Our cash O&A for the 53 weeks of fiscal 2010, which excludes depreciation and amortization, the impact of changes in self-insurance reserves, and share-based compensation decreased $12.3 million compared to the 52 weeks of fiscal 2009.
We are always looking at ways to control expenses given the current economy. However, as we've said many times before, we will not compromise on priorities such as customer service and other improvements at the store level, which are necessary to enhance the shopping environment and drive sales.
Moving on net income and EPS, the company reported net income of $14 million, or $0.25 per diluted share for the fourth quarter of fiscal 2010, compared to net income of $9.4 million, or $0.17 per diluted share in the same period last year. Net income for the fiscal year was $28.9 million, or $0.53 per diluted share, compared to net income of $39.8 million, or $0.73 per diluted share in the year ago period.
When making year-over-year comparisons, it's important to note two important items. First, 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 due to resolution of the company's insurance claims related to hurricanes that occurred in fiscal 2006.
Second, net income in fiscal 2009 includes accrued federal income taxes. As you know, net income for fiscal 2010 does not include federal income tax expenses due to the company's adoption of SAFS 141-R. Under SAFS 14-R, reversals of our deferred tax asset valuation allowance now reduce income tax expense rather than intangible assets.
Now let me address the financial impact of the store closures we announced last month. The store closures are expected to be completed by the end of the first quarter of fiscal 2011, which ends on September 22.
As disclosed in our press release, we expect to incur one-time charges in the range of $35 million to $50 million in the first quarter of fiscal 2011. This includes lease-related charges in the range of $30 million to $45 million and other charges including severance of approximately $5 million.
The operating results for the closed stores and for the store closing costs are expected to be reported as discontinued operations in the first quarter of fiscal 2011. As previously announced, we expect to achieve annualized savings in the range of $12 million to $17 million beginning in the second quarter of fiscal 2011 due to timing and transition costs. Additionally, the company expects to receive proceeds of approximately $10 million from asset sales including pharmacy prescription files.
Moving on to cap ex and liquidity, as of the end of the fourth quarter Winn-Dixie had approximately $649.7 million of liquidity, comprised of $497.4 million of borrowing ability under our credit agreement and $152.3 million of cash and cash equivalents.
We are especially pleased that we were able to invest about $189 million in our business in fiscal 2010 while still ending the year with a strong cash balance. We expect our capital expenditures to total approximately $158 million in fiscal 2011, of which approximately $80 million, which we spent on our store remodeling program. The additional $78 million of our cap ex will be used for other capital expenditures including retail store maintenance, information technology, and other projects. We currently have no borrowings under our credit facility, which matures in November 2011.
Now let me hand it back to Peter. Peter?
Thanks Bennett. I want to thank all of you again for joining us this morning, and for your interest and for your support.
This was clearly a very tough conclusion to a year in which the company had been holding up fairly well under very difficult conditions. Although we cannot control when the economic competitive environment improves, we are committed to making the necessary changes to meet the deepening challenges we face as a company.
It's not going to be easy, but I remain optimistic about the future of our business, and I am confident in our team and our long term strategy. And as we address the current challenges we face, we will also continue to execute the strategic initiatives that will enable us to grow the company over the longer term and rebuild this unique and valuable brand.
Operator, I think we're ready now for the Q&A session.
[Operator instructions.] Your first question comes from the line of Karen Short of BMO Capital. Please go ahead.
Karen Short – BMO Capital
Starting with your gross margin investments, can you give a little color on why you think 28.2% is enough to really get you traction? I kind of think of it in two ways. If I look at Publix's four-quarter LTM gross margin and it's set at around 26.6%. I'm pretty sure it's apples to apples. So how do you get comfortable with 28.2% And then just looking at your guidance, I understand that the first quarter had Gulf and also no benefit of the store closures, but you still seem to be expecting a pretty material reversal in your customer trends and your profits by the end of the fourth quarter to achieve your guidance. So maybe a little color on that?
Let me take part of it and then I'm going to hand it off to Dan Portnoy to give you a little more detail on the margin part. First of all, the first quarter is always our softest sales quarter we have for the year. I think as everybody knows we benefit when the snow birds come down after Thanksgiving. But this time frame during the summer and into the fall is our weakest quarter for sales. So we had a very slow sales period in the first quarter. The investment that we're making in rate will start taking place in this quarter but we won't get that fully baked in or get the results.
We have a shrink issue in the first quarter in our perishables which we will have resolved, but quite frankly we actually brought in more product than we should have for the July holiday and the sales just didn't turn out the way we wanted and we didn't move fast enough so we had a shrink issue. That's baked into the first quarter, which won't repeat itself going forward.
The new sales initiatives that I talked about, was fuelperks or the computer generated ordering. They're starting to get traction now but we'll get the upside from those as we move throughout the year. And the other part is the cost reductions that we talked about last quarter. Those you really see the effects of that beginning in the beginning of quarter two.
And just to add to it, we were a little bit high on labor in the first quarter. We'll straighten that one out. So there are a bunch of different things that affected us negatively in this first quarter that won't reoccur going forward and we do believe that the rate that we've got baked in there for margin investment, based on prior track record, is appropriate as we move forward. But Dan, you want to add anything to that?
Yes. First thing was you had asked about the appropriateness of the 28.2% and will it get us the sales, and as Peter said, we've been tracking along. The first quarter we've had a good improvement in sales and trying to tweak the dials to drive some incremental sales. We've also been working with our manufacturers on the CPG side as well to give us extra deals and we've been moving the needle that on the [unintelligible] store as well. Your second question I think was the relationship to Publix. We don't know what they put in their number but their as-reported number for the last four quarters is 28.7%, which is still 40 or 50 basis points less than where we're at.
And I guess maybe just looking at the competitive environment, you commented that it had gotten tougher, but I guess that seems to be somewhat contrary to what we're hearing out of Walmart in terms of them kind of reversing course a little bit. So maybe can you comment a little bit on the competitive environment and then give some color on how many competitive openings you're expecting to see in '11 versus '10?
The fourth quarter what we saw was really the results of Walmart initiating additional rollbacks, some very heavy TV coverage, and as a result of that our competitors, particularly in the Southeast, began becoming a little bit more promotional in their ads and I think as noted Sweetbay earlier went on a pricing reduction throughout their stores. So there's been some activity.
Walmart definitely got more promotional during our fourth quarter. I think what you've heard since from Walmart is that didn't work all that well and they've returned to, I think, their roots and gone back to an everyday low pricing philosophy versus this high-low they tried to roll out, and they've also said they've gone back to, I guess they call it actionality and they're filling that up with products again, and they're reevaluating what they're doing with assortments. So what we saw was they were very active in the fourth quarter. Apparently that didn't generate the desired results and I think they've moved back to more of where their roots were.
So very very effective in the fourth quarter creating promotional drive from our competitors, however as they move back I think it will probably create a little bit more rational market as we move forward into the end of the first quarter and then into the second quarter on. As far as competitive openings, that's going to remain about the same as where we were last year as we move into this year.
Okay, and so last question. Just on your ABL, I know it doesn't expire until November of '11, but there's also been some question as to whether or not it would make sense for you to refinance it early. I understand that comes at a cost, but that might give you some flexibility in terms of issuing a one-time dividend or buying back stock. Can you maybe give us your latest thoughts on that?
The ABL expired in November of next year. We've got a lot of time out there. What we do is, we are working right now with the banks to explore opportunities there, and at the right time we will make a decision how we want to move on that line.
Your next question comes from the line of Scott Mushkin of Jefferies.
Scott Mushkin – Jefferies & Company
Just wanted to dive into the competitive environment a little bit more and try to understand your confidence in - you're now investing in price and why you think there won't be a response from some of your competitors. I just don't see, if the economy remains very difficult, how we kind of get out of this. I mean, you respond, and Delhaize has responded to Walmart. Why should we feel comfort that there won't be a commensurate response out of your competitors now that you're getting more aggressive?
Well first of all, I'm not responding in everyday price. I'm responding in promotional activity, okay? As you know there's a big distinction between going back into your everyday pricing and using a promotional tactic. I think what Walmart is doing now, if I understand their response, is probably more rational than what they were doing before.
Last quarter, with the heavy advertising on television, with all this noise about rollbacks, I think they were - what did they have, a $5 Coke and Pepsi suitcase they were advertising? And those created turmoil in the marketplace, and obviously didn't drive what they were looking for. So they backed off of that. It becomes more rational.
Obviously, as we get more promotional other people may respond to that promotion but what we've done is we look back last year and the year before at the level of promotional activity we needed to do to drive the sales that we're going to need, and we feel that we're in the right sweet spot where we can drive that.
Coupled with that is that we're moving on with fuelperks, which - that's something that we can do because we've got the card and we've got ownership of that card. Others cannot do that. And with this ordering system that we have now, computer assisted for our stores, we believe that that's got a real upside on sales for us as well. So we think we've found the sweet spot on margin.
We think that the Walmart activities will make it a little bit more rational, although we do expect response. We do some promotional activity from our competitors but it is a measured response that we've put together and we think we've got the right levels of margin to drive that.
I guess maybe a couple follow ups. You went a long time resisting doing this type of thing because I think you would say, and I would agree, it's kind of throwing some good money after bad. If I look at where the comps are running now, it seems like we've just kind of gotten back to where we once were. And so do we look - when we look at what Walmart's doing, and it's in the past, I guess I'm trying to understand why you would do what you're doing now, given that we think Walmart's kind of done doing what they have done.
Okay, well there's two parts to what we're doing. Some of these initiatives, whether it's fuelperks, or the computer assisted ordering, that's just - computer assisted ordering is just a better business practice, which is going to drive top line sales. And we piloted this. It's working very very well and now we're in a full rollout and that's just going to drive sales with a measured investment that's going to have a great return for us.
Fuelperks was just a natural extension of our card and our ability to fully utilize that card, so that's not - I always talked about not over-promoting in a down market. Use of the card is just appropriate response to a tool that we have in our war chest, and rolling that out.
As far as the margin investment, I have said don't over-promote, but what we've done here is strategically take a look at a few departments where we think we can jump-start the sales, because quite frankly, and I guess I can get criticized for it, we made the decision in the fourth quarter not to chase sales and I think that hurt us a little bit running into the first quarter, and I need something to jump-start it and then balance it off as we move throughout the year.
So I think the responses that we take are measured. I think they're balanced, and I think that in the long term they reflect the philosophy that we've had about not over-promoting in a down market.
One final one. The EBITDA guidance, and if I've missed this I apologize. The sale of assets, is that in that 100 to 130?
No it's not. That's an offset to the costs of closing the discontinued stores.
Okay, perfect. And you know, guys, good luck. I've always been an admirer of the way you've run this company, so I really wish you good luck on the next year.
Your next question comes from the line of Alex Bisson of Northcoast Research.
Alex Bisson - Northcoast Research
One quick clarification on your first quarter EBITDA guidance. I'm assuming that doesn't include any hurt from the cash expenses associated with closing stores?
Yeah, the expenses associated with closing stores will be shone in discontinued operations. Our EBITDA guidance is for continuing operations.
Gotcha. Peter, as you look at your assumptions for comp growth, what do you have baked into that from market growth?
Well, we established the comp growth - we go market by market and in some markets we've got some pretty good growth. Others have been - it's the same, and markets where we've closed stores we're going to have some market deterioration. So it's a market by market analysis.
Do you think just in general the market has returned to growth, or do you think it's still contracting?
I think depending upon the market, there's some that are still contracting, there's some that are balanced out, and then it depends upon the competitive activity that's going on there. The whole market share thing has driven a lot of it by the amount of new stores you're going to open and the amount of stores you're going to close. For the past several years, Winn-Dixie, we've been closing stores and not opening them, and that's contracted our market share.
This past six months we just opened up two new stores, so this is the beginning of us starting to open new stores with the ability to grab market share and I'm very very enthused about the response that we've gotten to the two openings - the store we opened in Covington, Louisiana, and the store that we opened in Margate, Florida. The response has been overwhelming by the consumers.
These stores are meeting, or approaching, what the average sales per square foot is in the industry, and that is one of the obstacles that Winn-Dixie had for a long time, was the low average sales per square foot. And now I think we've found the format that gets us to where the industry average is and I've always talked about the opportunity there is huge.
So I'm very much enthused about what we've been able to put together at Margate and what we've put together in Covington. We've just done an enlargement in Mobile, Alabama, and again this one continues to support what we've found at Covington and Margate, and those are opportunities to increase our market share and increase the brand loyalty and drive secondary customers from other competitors to become possibly primaries of ours and getting primaries from other competitors to become secondary of ours. So we're feeling very very good about that.
One question on your pharmacy operations. Could you talk a little bit about your pharmacy traffic or script count?
Our pharmacy script count is running, as reported, down a couple tenths. When you convert, as our major drug competitors do, for 90 day scripts, we're running positive.
And then, I guess my last question. I know you won't get the benefit of snowbirds for a couple months, but do snowbirds tend to be more receptive to the fuel-based marketing programs, because perhaps they're a little bit more familiar with it, coming from their home geography? Or are fuel-based programs just universally loved by everyone equally?
Well, I think in these challenging times, it's loved by everybody, although obviously when a consumer comes from a marketplace that already has a fuel perks program, they're aware of it and have realized the benefits of it, so they're faster to put their arms around it. But in total, I think everybody loves to save a buck on a gallon of gas. We know that this whole fuel thing has more price elasticity to it than anything else you do. I've never seen - by moving the price of a gallon of gas by $0.10 or $0.20 how many people will stand in line to get that savings. So we think we're on to something here. We think it provides great value for the total environment of the consumers that we have, and it clearly helps us build the basket in the stores as the customer buys more to get more cents off per gallon.
Your next question comes from the line of Meredith Adler of Barclays Capital.
Meredith Adler – Barclays Capital
I'll start by saying that I have some of the same concerns that I think Scott expressed, that you could end up promoting and not getting as much out of it as you want, that it's kind of like pouring money down a big hole. But I guess you've already gotten some response in this quarter. I was wondering if we could then talk about a few other things. Maybe the first is just to focus on some liquidity issues. Bennett, any idea how much rent you're going to have to be paying on the dark stores? The stores you're closing? 25 stores?
Yes, based on all the leases, it's about $1 million a month, but we're still looking at how we can dispose of some of that storage, whether the landlords want them back, or we can sublease them to non-competitive entities. So I'll have more for you later, but right now it's about $1 million a month.
The other important thing on that, Meredith, those stores were not covering the rent before. So that's carryover that we had before, and I've been very enthused by the response from other businesses looking to take over some of these sites. So I think now that we're finished we're going to be able to move some of these along.
And many of those leases expire within the next one to four years, so they're not real long term.
And Meredith, I come back to your comment on sales. I think you know me well enough that we take a very very hard look at where we spend and how we spend, and we've gone back and analyzed where the best spends have been at Winn-Dixie, and spending appropriately to get this thing jump started again. And I know the risks that we run when do this, but I think in the areas that we are focused on sales building have a very very good return for us at Winn-Dixie. So again, we've thought our way through what could and what possibly may happen. We think that we've got the sweet spot that will provide the desired result. Again, there's always the unknowns, but I think we're on the right track.
Okay, and then another question back to Bennett - actually two related questions. If you were to hit $100 million of EBITDA, which is the low end of your guidance, would you end up - do you see any reason to believe that you would still not end 2011 in a net cash position, positive position?
I think you're right. I would see us ending in positive cash.
Okay, and then I'm going to make the assumption you're - as your facility matures in November of '11 you want to get it financed before November of '10, since you don't really want that facility to be current. Is there any reason to believe that the banks, given that you're going to be in a net cash position again, that the banks won't be perfectly comfortable - I mean EBITDA's weak, but is there any reason to believe you will not get financing?
Well as you know Meredith, it's an ABL line, so they're more concerned with the collateral than they are with the EBITDA. And I see no reason why we won't be able to refinance the line. In terms of timing, going current, we have no borrowings, so going current puts nothing on our balance sheet that's currently due. That said, we are working with the banks and we will refinance at the appropriate time.
And then I would just like to talk a little bit, real quickly, about these investments you're making, very expensive investments, in the 22 remodels. Maybe you could just give us a little bit more comfort. I don't know how long Margate and Covington have been open, but do you perceive that this is risky, because it's a lot of money?
Covington has been open for over five months now, and Margate's been about two months. Covington's got a long enough track record that I believe that those sales are very sustainable, in fact growing. And Margate, albeit a couple of months, and again that will be influenced when the snowbirds come back down in the fall, again I think that we've got a very similar track record there. And what really makes me feel good is we've now done an expansion down in Mobile, Alabama and we're getting the same type of results right out of the gate.
So we think this format is dynamic. The customer response is - I can still go to these stores and stand in the front door and customers are talking to me about it being the Whole Foods Winn-Dixie, with cheaper prices. At Margate they compare us to Wegmans up north. The responses have been dramatic, and these are people that are primary customers of other competitors, and they've said hey, for years we would not go to a Winn-Dixie because of the tarnished brand and what they knew about it.
Now either word of mouth or one of our advertisements, they made a decision to come in and they've said this to my face, they've said it to the managers there, and I'm not talking about a handful of response, I’m talking about hundreds of responses, that now I'm a Winn-Dixie customer.
These changes are so dramatic in these stores that we're able to - it's what we needed to do - have the ability to take a consumer from our competitors and have them become either a strong secondary or primary customer of Winn-Dixie. That's what we're finding out at Margate, Covington, and now in our store that we've expanded in Mobile, Alabama.
So I think we've got enough going on there that tells me this is a home run and we've found the keys to success. Having said that, for example at Covington, our sales are at what the industry averages out there of sales per square foot at about $470 I think is the latest calculation I've seen on the industry. That's what we were always trying to get. How do we bridge that gap between the three hundreds that Winn-Dixie was running and getting to the four seventies that the industry does?
So I think that the key to success is there. Now, this does run about $4 million to do a remodel of one of these, and that is more, but the returns we feel are going to be a lot stronger as we move downhill, plus it drives the loyalty with the customers and clearly changes their brand image in the marketplaces where we opened these up.
So I am very very convinced that this is the way we need to go. I'm very convinced that the returns are going to be high, and I think our level of success is going to be great. So I'm very confident that it's the right way to go. Of the 22 remodels we're going to do next year, 17 are designated to be this format, and we will keep you updated as we move along with the results on these.
Your next question comes from the line of Susan Anderson of Citigroup.
Susan Anderson - Citigroup
So just really quick on the remodel format again. How many do you think you can put within your current store base and will you go back and add these features to stores that were already remodeled, I guess similar to the Mobile, Alabama ones?
Well, we've still got over a couple hundred stores we haven't even remodeled yet, and we think the majority of those can be adapted to this format. It will take us time to get those done, and by the time we get those done, some of the original stores that we did back in 2007, most of the depreciation will have moved on, and there'll be appropriate timing to do those and those can be adapted. And so we think it's very adaptable, we think we've got a lot more stores that haven't been done that can be adapted to this program, and as we complete that we'll go back and put some of the features in some of the original ones. So it's got great adaptability for the company.
Okay, so going forward most of the remodeled stores will have the Covington-type format?
Right now, going forward, we're analyzing the store base, but for this year, of the 22 we're going to do, 17, or the majority of them, will have the Covington type of format. My instincts tell me as we're looking forward after that that probably the majority of them will have that as well, but we're still analyzing the data to determine how many stores in each year we're going to do.
And then it looks like you guys are kind of pulling back a little bit on just the number of remodeled stores, maybe because the cost is a little bit higher, but what are your expectations now going forward in terms of the percent of the store base you expect to be remodeled?
Well for this year we're going to do 22 stores, so you add that to the 230 that we have left, 252 by the end of the year, which is slightly more than half of the company. And then depending upon the economy, and what's going on, we will make a decision on how many we're going to do for next year. But obviously this year in total we've pulled back on our cap ex spend. We spent last year about $189 million and we're down to $158 million this year. So about $31 million we've kind of retracted back because of the economy right now.
And then just in terms of pricing power out there with the inflationary categories how are you guys seeing things? Is it getting easier or harder to pass on rising costs? What are your expectations going forward?
We saw in Q4, on the retail side, about 1% increase in the retail pricing. On the period 1 so far we've seen about 1.4% increase on the retail side. Now some of that on the cost side has been difficult to pass along as I indicated regarding milk and some of the meat products. However, and I don't know this for sure, but I've got a feeling this is going to continue in that direction, and I would hope by the second half of the year a lot of this cost inflation can be passed along. There can only be so much that gets pent up before I think this all gets released. So we're seeing retail inflation increased from Q4 to period number one. There is some pushback on some of the costs of inflation we can't pass along, but my instincts tell me that by the second half of our fiscal year that there'll be opportunity to move this along.
And just one more question in terms of the CBO program, is that implemented currently or it's still being rolled out, and then when should we expect to see the benefits of the program?
It's being rolled out as I speak. We should start to see benefits in the second quarter, and we should have the rollout completed by the end of our fiscal year.
Your next question comes from the line of Glenn Gawronski of JP Morgan.
Glenn Gawronski - JP Morgan Asset Management
Peter, Bennett, I just have a couple of questions for you. The first one is if I recall, the last time you guys got promotional was fiscal Q4 2008, which was the March to June 2008 timeframe. Your words were, kind of it was a disaster, and you wouldn't do that again and now here we are you're getting promotional again. Why will this time be different and will have different results this time around?
First of all, we had a much deeper investment we made in that quarter. We drove a lot of that through it was really the beverages, the Cokes and the Pepsis of the world, and it was a heavy spend and it didn’t get the sales return that we wanted, and in a down market we said that's not what we're going to do. This time, the spend is not as heavy, and it's much much more strategic where we're going this time, which I can't give you the details of because I don't want to let the cat out of the bag, but it's a totally different approach than we did last time. We did learn from that fourth quarter of how not to promote in a down market, and I think since then we've learned how to promote in a down market and the strategic direction we're taking with promotions is totally different than before.
And a question for you Bennett. Operating cash flow for next year - do you anticipate it will be greater than your adjusted EBITDA, like it has been the past few years?
Yes I do. I think we're going to have some opportunities there.
Kind of the same range? I mean you've been doing almost, this past year it's been between kind of $30 million $40 million differential? Can it be that high? Or maybe not at the lower level of EBITDA.
We have a chance of approaching that.
In which case, more than likely you should end the year with not just cash, but greater than $100 million in cash at the end of the year you would think, right?
I won't give you a project on that, but I can't argue too much with your numbers.
Okay, and just as far as - I just want to get the numbers right - so the NOL, can we just go over the details of that now? How much is it? How can it be used, and so forth?
$640 million right now. And in addition we have about $37 million in tax credits. All of it starts to expire in about 2022-2023. Right now there is no limit on our ability to use those NOLs or tax credits on income we make. The only limitation would be just as any other company there are federal tax rules around acquisitions which would cap the amount that could be used annually. But for us right now there are no limitations.
So if you were - what are the limitations if you were acquired, not saying that's going to happen, but just if you were as far as - is it only $30 million a year or something like that, or is it higher than that?
It's a calculable number. I can take you through that calculation offline if you want.
It would depend on the acquisition price and the [unintelligible], risk free interest rate.
From our standpoint, you guys have been fighting the good fight, but this is a very difficult business that requires a lot of capital and if we just look at the cold hard numbers over the past three years you've spent north of $600 million in cap ex. The EBITDA has gone from $165 million a couple years ago to now we're looking to $100 million to $130 million.
And here we are, you've spent over $600 million in three years, you're going to spend another $158 million in cap ex. Your equity market cap's $444 million. When I just look at the numbers I applaud you for the operations but is there some point where we just explore strategic alternatives here and say this could be much more valuable to somebody else, where someone else can utilize these NOLs more effectively than we can, and maybe the whole industry is better off with some consolidation? At what point do we get to that? At what time do we get to that point?
We don't speculate on those type of things. Although we always consider what's in the best interest of our shareholders, and we're always going to be focused on that. Regarding the capital investment, as you know this was a turnaround. In turnaround you've got to get your base up to where your competitors are so you can effectively compete. I think we've done this on a very very focused basis, but you've got to remember we've just had the worst economic downturn for the past year, year and a half that we've had since the Great Depression.
So thank god we made the investment we made to stabilize the space and provide us with the opportunity to come out of this thing. I think we're going to come out of it. I think we've rejiggered the space so that it can compete for the future, and I think we've found the keys to success with the new formats we've put together with Covington, Margate, and now Mobile, Alabama that can be a great hit to us.
So I think the team has done a very very good job during a very challenging economy. We needed to do the investment to get the store base current and up to speed so that we can bring the customers back to Winn-Dixie that left because the store base had been abused for so many years.
So I think the strategy's been right. I think the strategy is correct for the future, and I just hope and pray like everybody else that this economy gets better and gets better soon.
Your next question comes from the line of Andrew Wolf of BB&T Capital Markets.
Andrew Wolf - BB&T Capital Markets
I just wanted to follow up on the remodels that you're calling out at Covington and the Mobile store and Margate, on the new stores and the remodel at Mobile. Peter, can you just kind of basically confirm, if you haven't done so, the general unit economics that I find in the industry, and most retail types of segments, not just supermarkets, that higher sales per square foot generates higher profit, EBITDA per square foot and better returns. And I assume that's why you're - other than the sales, that's part of what's going on but I just wanted to confirm that.
Andrew that's exactly what we've found there and that's exactly why we're moving forward with these. You get a much higher sales per square foot and that translates into a much better return on the bottom line.
And when you look at the store base, what's your sense, or your analysis of what percent of Winn-Dixie's current store base has the right demographics for the type of stores you're talking about?
Right now we're in the process of analyzing the remainder of the store base, but in my opinion these stores, for at least two thirds of what we have left, and top of my head on that one, are appropriate for this model. Two thirds of the remaining store base that we have not remodeled to date is probably appropriate for this model. I also think, and we haven't finalized it yet, that the model can be also tweaked for other environments that can be put in for the future.
Now regarding the initial store base that we did I think almost 100% of that probably going forward, as we come back to look at those for remodels down the road, are probably appropriate for this format.
So this is not just a high end - to put in a high end neighborhood?
This is just not high end. This works in your average American neighborhood. It's a wonderful supermarket. Obviously it's skewed to perishables, because that's what people want. It's a friendly market, it's a fun market, and the response from the consumers has been overwhelming. And I think you guys know me. I'm in the stores, and I stood in the front doors of these stores for two or three days and I was just overwhelmed by the consumer responses. It told me we've found the key to success. We do a lot of data updates on consumers with Delphi, and again those reports have come back and supported what we felt, that this is something that the consumer really likes. It will drive them to become an either primary or secondary customer of us. It will help us build market share.
And your final question comes from the line of Karen Short of BMO Capital.
Karen Short - BMO Capital
I actually just had one or two housekeeping questions. Peter, I don't know if you mentioned it, but what was the basis point impact of the excess of shrink in the first quarter?
I didn't mention that, and I don't think we ever do. All I said was we had higher shrink in the first quarter than we've experienced before. It's not on the dry side of the business. It's predominantly in the perishable side, and quite frankly we know what it was. We just brought out more merchandise than we should have. Didn't react quite quick enough, and we had a shrink problem, which we're correcting.
And then do you have a sense of what the timing of the remodels will be throughout the year?
Right now we're trying to finalize the plans for the remodel, so obviously the majority are going to be the second half of the year. But I don't have the timing for them yet.
Okay, and then just the last question. Can you give us an update on the share distribution? Have all those shares hit the various creditors' accounts? Do you have any sense of where we stand with that?
We believe they have hit the accounts. As you know, we distributed about 6.8 million shares that hit the accounts probably within two to four weeks after we distributed them on about June 18, and if you look at the trading in our stock you can see some of it pushing through. We trade about 300,000 plus shares so what we distributed was about 20 days or a full month's full trading. So it's taken some time to go through. We don't know for sure but we think it's coming to a conclusion now, but I think it still has a bit of a ways to go.
Ladies and gentlemen, that concludes the Q&A session. I would now like to turn the call back over to Mr. Peter Lynch.
Well again I'd like to thank all of you for your support, spending time with us this morning. And in conclusion I just want to let you know that I am very very optimistic about our plans. I'm very enthused about what we've found at Covington, Margate, and Mobile, Alabama, and I'm very enthused about the team and our prospects moving forward. So again, thank you for joining us and look forward to talking to you again in the future.