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Winn-Dixie Stores, (NASDAQ:WINN)

Q1 2011 Earnings Conference Call

November 2, 2010 08:30 am ET

Executives

Eric Harris – Investor Relations

Peter Lynch - Chairman, CEO and President

Bennett Nussbaum - Senior Vice President, Chief Financial Officer

Dan Portnoy - Senior Vice President, Chief Merchandiser and Marketing Officer

Analysts

Susan Anderson - Citi

Meredith Adler – Barclay's Capital

Bruce Zesser - Advisor Research

Karen Short – BMO Capital

Chuck Cerankosky – NorthCoast Research

Scott Mushkin – Jeffries and Company

Damian Witkowsky – Gabelli and Company

Presentation

Operator

Good morning ladies and gentlemen and welcome to the First Quarter Fiscal Winn-Dixie Stores Earnings Conference Call. My name is Alisha and I'll be your coordinator for today. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If at anytime you require operator assistance please star followed by zero and a coordinator will be happy to assist you. As a reminder this conference call is being recorded for replay purposes. I would now like to turn the conference over to your hostess for today Mr. Eric Harris, Investor Relations. Please proceed.

Eric Harris

Good morning and thank you for joining us to discuss Winn-Dixie's financial results for the first quarter of fiscal 2011. Joining me this morning are Peter Lynch, Chairman, CEO and President and Bennett Nussbaum, Senior Vice President, Chief Financial Officer and Dan Portnoy, Senior Vice President and Chief Merchandiser and Marketing Officer. Before we begin let me remind you that the information presented and discussed today includes forward-looking statements made under the Safe Harbor Provision of the Privacy Security Litigation Reform Act of 1995.

The risk and uncertainties related to such statements are detailed in our SEC filings. Today's call also 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 which is available on the investor relations section of our website at WinnDixie.com

Today's call is being recorded and a transcript will be archived. A replay of the call will be available on the investor relations section of our website later today. I will also be available after today's call for additional questions. Bennett and Peter will begin with some prepared remarks and afterwards we will open up the call for your questions and now let me turn it over to Peter Lynch.

Peter Lynch

Thank you, Eric, and good morning everyone. And thank you for joining us to discuss our first quarter results for fiscal 2011. A supplemental press release, although adjusted EBITDA was negative in the first quarter our identical store sales trend improved by 220 basis points compared to the fourth quarter of fiscal 2010.

Compared to the year ago period identical store sales decreased by 2.8%. This was driven by a decrease in transaction count of 210 basis points and a decrease in basket-size of 70 basis points. In the first quarter identical store sales were negatively impacted by competitive activity and other general market factors as well as the continued mix-shift from branded to generic pharmaceuticals, which cost us about 80 basis points.

Identical store sales were also negatively impacted by the Gulf oil spill which cost us roughly 40 basis points. As I mentioned last August our top priority right now is improving sales trends. Strategic adjustments to our promotional activities and to new expanded sales initiatives across the chain. In adjusting a promotional activities we monitor competitive activity very closely and make measured adjustments where we see the most promising opportunities.

These adjustments improved our identical stores sales trends from the fourth quarter of fiscal 2010 resulting in 190 basis point improvement in transaction count during the first quarter. While this is encouraging the investment and promotional activity negatively impacted our gross margins by 80 basis points. In the near-term we believe it's critical to focus on the top line and the actions we took this quarter were necessary to position us to achieve sustainable and profitable sales growth.

Our challenge going forward for us will be to maintain the positive momentum up sales while also improving margins. The other factors help address sequential improvement in our ID sales trends, are the companies new and expanded sales initiatives.

Like our successful fuel purchase programs, this customer incentive program continues to generate positive responses and is a great opportunity to drive incremental sales across our chain. Additionally our computer generated order program, also known as CGO, is continuing to do very well. This program is helping improve sales by reducing our out of stocks. As of the end of the first quarter we had the program running at $108 stores and saw an improvement in total identical store sales of 10 basis points.

We expect to roll out the program across the entire chain by the end of the fiscal year and anticipate it will benefit the companies identical store sales by a total of 50 basis points by the end of fiscal 2011. I would now like to briefly discuss our remodel program and new stores.

As you'll recall we provided extensive updates on our remodel program on the fourth quarter call. We plan on providing a similar update at the end of the fiscal year as well with three status updates on the program each quarter. Our remodel stores are continuing to outperform the chain since the programs inception, 179 offensive remodels has generated a waited average sales increase of 6.7% on a cumulative basis since the grand reopening, which includes an increase in transaction count of 2.9% and an increase of basket size of 3.7%.

And our 51 defensive store remodels, waited average sales has decreased 6.2% on a cumulative basis. However, when you adjust for the impact of the new competition we estimate those stores have generated a waited average sales increase of 4.1% on a cumulative basis. Our new stores have come into the market continues to exceed our sales expectations. We are very pleased by the performance of these stores which exemplify our fresh and local strategy and overall effort to offer customers an enhanced shopping experience.

We continue to believe that these stores offer potential for higher returns, will significantly enhance our ability to attract new customers, which is a critical component of our ability to drive long-term sales growth.

During the first quarter we also opened a transformational remodel in Mobile, Alabama. This is the first remodel completed in fiscal 2011 and it follows the same format used in Covington's and Margate. The Mobile location is now a state of the art facility that showcases our latest design concepts in a sleek and modest supermarket.

Some of the store highlights in Mobile include upgraded departments, expanded shopping features, neighborhood merchandising and best in class customer service. Customer are enjoying the new amenities at a store including an outdoor farmers market, expanded meat, seafood and wine departments in a dedicated area offering free wifi access and coffee.

The feedback has been overwhelmingly positive and we look forward to rolling out these concepts at other stores across the chain during the fiscal year. Now before turning the call over to Bennett I will discuss our outlook for the remainder of Fiscal 2011.

We continue to expect adjusted EBITDA for fiscal 2011 will be in the range of $100 million to $130 million. We are working hard to improve sales and adjusted EBITDA the remainder of the year. We'll continue to adjust our promotional activity and implement sales initiatives to take advantage of the opportunities in the market place.

However I can assure you that we'll be strategic and measured in our approach to promotions and we continue to expect the profitability to improve as we move through the years. We expect improvements to adjust EBITDA during the remainder of the fiscal year based on sequential improvements in ID sales, savings related to our headcount reductions, and our store closing initiatives and by exercising disincline we expect towards (inaudible) with that all turn it over to Bennett to review the financial results in more detail.

Bennett Nussbaum

Thank you, Peter and good morning everyone. Before we open the call up for Q&A I'll run through a few key items for the quarter. I'll begin with other operating and administrative expenses. The companies other operating and administrative expenses for the first quarter will approximately $460.4 million. An increase of $10.22 million compared to the same period last year.

The company's cash O&A which excludes the depreciation and amortization, share based compensation, and prior year's self-insurance reserves; increased by approximately $6.7 million compared to eth same period last year. The $6.7 million increase in cash O&A is due primarily to an increase in retail payroll expenses of $4.2 million; mainly due to new and remodeled stores and an increase in our average wagering. In addition cash O&A was negatively impacted by an increase in employee medical benefits of $1.3 million and severance costs of $1.1 million associated with non-retail headcount reductions.

As always we continue to review 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. Now let me provide some details on the financial impact of our store closures initiative.

As a result of this initiative, 30 stores were classified as discontinued operations. For the 12 weeks ended September 22nd, 2010 the loss on disposal of discontinued operations consisted of $33.5 million of lease termination costs and $3.2 million of other costs. Partially offset by $8.4 million in net gain on sale and retirement of assets. I should note that the store closures impacted our total EPS in the first quarter.

The company reported a net loss totaling $6.8 million or a $1.39 per diluted share for the first quarter compared to a net loss of $8.1 million or $0.15 per diluted share in the first quarter of fiscal 2010. The includes a net loss of $40.1 million or $0.73 per diluted share for discontinued operations related to the store closures as compared to a net loss from discontinued operations of $2.4 million or $0.05 per diluted share in the first quarter of fiscal 2010.

Per continuing operations we reported a net loss in the first of $36.6 million or $0.66 per diluted share compared to a net loss of $5.6 million or $0.10 per diluted share for the same period last year. The net loss from continuing operations includes a deferred tax expense of $13.3 million or $0.24 per diluted share to reflect an increase in the company's valuation allowance of its deferred tax assets.

Excluding this deferred tax expense net loss from continuing operations would have been $23.3 million or $0.42 per diluted share. As a result of our store closures initiative we remain on track to achieve annualized savings in the range of $12 to $17 million beginning in the second quarter. Also, as previously announced we received proceeds of approximately $10 million from assets sales including pharmacy prescription vials in the first quarter of fiscal 2011.

Moving on to CapEx and liquidity; as of the end of the first quarter Winn-Dixie had approximately $577.3 million, excuse me, of liquidity comprised of $477 million of borrowing availability under a credit agreement and $133.3 million for cash and cash equivalence. Our cash decrease $22 million and our borrowing availability decreased by approximately $48.3 million due to a reduction in borrowing base from the store closures and from a reduced appraised value on leasehold interests.

We continue to expect our capital expenditures will total approximately $158 million in fiscal 2011, of which approximately $80 million will be spent on our store-remodeling program. The additional $78 million of CapEx will be used for other capital expenditures including retail store maintenance, information technology, and other products.

Now let me hand it back to Peter, Peter?

Peter Lynch

Thank you, Bennett. Thank you all for participating in this morning's call. As always we appreciate your interest and your support. We are working very hard to execute on the strategic initiatives we discussed today in order to continue to grow sales and adjusted EBITDA as the year progresses. We know what we need to do to meet our objectives and are confident that with the strategic and measured approach we can achieve our guidance and grow the company over the longer term.

Operator we're now ready for the Q&A session.

Question-and-Answer session

Operator

(Operator instructions). Your first question comes from the line of Scott Mushkin from Jeffries and Company. Please proceed.

Scott Mushkin – Jeffries and Company

Hey guys, thanks for taking my questions, I was wondering, Peter, you didn’t – last quarter you gave us a feel where car trends were running. I know you said it was off a couple hundred basis points and then it came in of course up 220. I was just kind of wondering if you could give us a look at current trends and then also in conjunction with that, maybe, a look into the current competitive environment?

I know last quarter you talked about that environment remaining very difficult and maybe even getting a little worse. I was wondering if you could just go into what you're feeling right now?

Peter Lynch

Okay, Scott, regarding sales you obviously saw the improvement we had from the fourth quarter to the first quarter and we're continuing to see better results. Our year to date number is now through last week training at 2.1% so we've continued to improve and close that gap. As far as competition I would say that it is stabilized since the last time we talked. I'd say where I've seen some activity is probably – the Dollar store has got a little bit more aggressive with more detail in their ads, more items, and we continue to see the drug stores continually go after the suicide of the business.

I would say that Wal-Mart has probably done what they said they were going to do and kind of gone back to what made them a great company before and they've moved out of the hi-lo and back into an everyday format and our main competitors I would say, virtually no change from the last time. So all in all, it's probably stabilized a little bit and I'm a little bit more optimistic as I look into the remainder of the year.

Scott Mushkin – Jeffries and Company

Okay, so maybe a couple of follow-ups here. Just to clarify, so if you're running Q1 year to date that suggests the second quarter is actually under us too. So in the one change, is that correct?

Peter Lynch

The math course I took came out with that same number.

Scott Mushkin – Jeffries and Company

Okay, good. I wanted to make sure I was thinking about it correctly.

Peter Lynch

You got it.

Scott Mushkin – Jeffries and Company

And then the second clarification I just wanted to understand the language you guys had in your release, you talk about positive EBITDA in the second quarter, I was (inaudible) does that mean it will actually be positive to the quarter or the run rate will be positive when you close the quarter? I'm just trying to understand if we should expand another negative EBITDA quarter in the second quarter or will it actually be a positive number, in your mind?

Peter Lynch

Be a positive number.

Scott Mushkin – Jeffries and Company

Be a positive number? Great, I'll yield the floor, thanks, appreciate it.

Peter Lynch

No problem.

Operator

Your next question comes from the line of Chuck Cerankosky, from NorthCoast Research. Please proceed.

Chuck Cerankosky – NorthCoast Research

When we're looking at the cash flow statement, Bennett, for this reported quarter. Specifically inventories and payables both generating cash, how does that relate to the level sales and the discontinuation of business in 30 stores?

Bennett Nussbaum

The merchandise inventories are a $36 million contributor; probably $25 of that was from the store closures and the balance was a little seasonality there and with regard to accounts payable there's a lot of different things going on in there. Payables go down with the inventories. We increased some payables due to the store closures, have the lease payments, and then paid some accrued taxes we had from the bankruptcy. So there's a lot of noise in the payables number.

Chuck Cerankosky – NorthCoast Research

So really, it doesn’t necessarily correlate with anything going on in sales or the closures.

Bennett Nussbaum

Exactly correct.

Chuck Cerankosky – NorthCoast Research

Okay, all right, and then I think it was $10 million you guys got from asset sales? What generated that?

Bennett Nussbaum

The far – the great bulk of that was from selling scripts in stores where we closed the pharmacies and close the whole store, the pharmacy we auctioned off the scripts we had in our files.

Chuck Cerankosky – NorthCoast Research

Got you. Can you say how many files that was and with the potential for generating additional cash from the store closures whether its equipment in the stores or selling leases, selling owned properties, etc.

Bennett Nussbaum

I think that will be a relatively small number, Chuck.

Chuck Cerankosky – NorthCoast Research

How about – how many files did you say?

Bennett Nussbaum

I just don’t have that number with me.

Chuck Cerankosky – NorthCoast Research

Okay, all right, thank you.

Operator

Your next question comes from the line of Karen Short from BMO Capital, please proceed.

Karen Short – BMO Capital

Hey there, just a follow up on the ABL or sorry, on the scripts file, a question that's second quarter event, correct?

Peter Lynch

That was a first quarter event. That's offset ...

Karen Short – BMO Capital

Okay.

Peter Lynch

... to the charge fleet. We are slight – that was cash in the first quarter and there was a positive income while setting the charge we took for the store closures.

Karen Short – BMO Capital

Okay. Got it, okay, and then can you just give us an update on what you think the status of sub-leasing the 25 closed stores may be?

Peter Lynch

We're working through that right now with our landlords with people who have come to us and want to sublease some of them and really there's no update on that, Karen, until we actually have some deals.

Karen Short – BMO Capital

Okay, you're still coming in at two-thirds of the store base kind of range being eligible; I think that's what you were at last quarter?

Peter Lynch

Yes, I think that's fair.

Karen Short – BMO Capital

Okay and then I guess just kind of looking to your guidance, I mean I would – I mean pardon me if I'm paraphrasing this incorrectly but it seems like maybe this quarter you're EBITDA is a little less than – well it was less than you kind of had internally expected it to be. That you may change your guidance so I guess can you maybe help me understand a little bit about what's going on in terms of how you're thinking about your margins and your top line kind of going forward to be able to reach your guidance range throughout the year?

Peter Lynch

Well, Karen, you know our number was pretty close to what we expected in this very first quarter, you got to remember that last year in Q2, Q3, and Q4 we generated about $122 million in adjusted EBITDA so I'm very optimistic about – as you know the first quarter is the one that we are subject to not having a snow burst out here. So it's the quarter where we have the least amount of sales and most difficult to leverage as we move into Q2, 3, and 4, we get snow bursts out here, our sales peak and it's a great opportunity to leverage.

I continue to see progress on the identical store sales front so that'll continually help us throughout the year and we will moderate our margin investment as we continue throughout the year as we hit our numbers, so all in all I think we've got a very good plan. I'm very confident in hitting the numbers.

Karen Short – BMO Capital

So can you just talk, I mean from a broader perspective what you did in the first quarter that you think that you can – that gives you confidence that you can keep that customer? I mean I know you guys are doing great things and you have a lot of initiatives in place but do you feel comfortable that one quarter of promotions is adequate kind of to keep that customer coming to your store?

Peter Lynch

Okay, Karen, what I said before is the promotional activity we're doing is very strategic and measured. The best example I can give you – what we're not doing is going out there and running (inaudible), that's a customer you get one week and they're gone the next week.

We're more focused in our departments. With our fresh and local approach and really going after the customer with the items that they're going to use week in and week out and make sure that they feel comfortable that we've got quality products. We've got the right variety they want. Get them in our department to shop and so it's very sustainable what we're doing.

Karen Short – BMO Capital

Okay, great, and then I just – one last question on your ABL can you just give us a status update on where you are in terms of renegotiating or what you're thinning in terms of renegotiating (inaudible) terms of getting close?

Peter Lynch

Yeah.

Karen Short – BMO Capital

And then what the impact would be on interest expense with the renegotiation?

Peter Lynch

First of all we are engaged with our banks right now in setting the timing on how we do this so we're off the mark on that Karen and secondly we have one of the worlds best ABL's in place now. So whatever rates we have will in fact be higher but until we close the deal I really don’t want to speculate on what the interest expense increase will be.

Karen Short – BMO Capital

Okay, thanks for taking my questions.

Operator

You're next question comes from the line of Meredith Adler from Barclay's Capital, please proceed.

Meredith Adler – Barclay's Capital

Thanks for taking my question. A lot of what I wanted to know has already been covered but maybe we can just talk a little bit about (inaudible) and it sounds like 10 new stores you've opened and the big remodel in Mobile that interprets as clearly something that has to be up to the quality of the competitors but I don’t think this service was necessarily a great strength in Winn-Dixie in the past. Could you just talk a little bit about how you're focusing on it, how open is the organization to raising the level of service?

Peter Lynch

Meredith the old company I don’t think was focused as service and I think the biggest issue has to do with people and we've worked very, very hard these past five years in making sure we've got the right people running our stores, right people working in our stores, right people in our office, right people in our distribution centers.

At the end of the day its all about people and when you get people that understand they need to take care of a customer and upper management sets those examples and gives them the right type of payroll, they hit targets they need to hit, you can accomplish great things.

Now one of the things that as I talked to our regional VPs and other people about the success of these three transformational stores that we've done, one of the things that shouts at you all the time is they got all the right people in those stores and we need to make sure we've got the right people in every single one of our stores. I think I've told you before that we've replaced almost 200 store directors in the past five years.

So we're very committed to getting the right people out there that understand that taking care of the customers is number one and I think the people, the direction that management is giving the company and by providing them with the right number of hours in the stores I think we're hitting our service objectives.

We've still got more to do but that's one of the key areas of focus at Winn Dixie today.

Meredith Adler – Barclay's Capital

And when you do customer research have you seen over time a change in perceptions, is that only associated with remodeled stores? Particularly these you know in the two new ones or are you seeing generally a change in customer's view of Winn Dixie?

Peter Lynch

We've done customer research extensively since I got here, when Dan Portnoy got here, even enhanced more. We had one group that’s been doing research for us probably goes back five or six years prior to us going into Chapter 11. We have increased in each of the areas that they look at regarding what the consumer’s attributes are for a good supermarket.

We’ve dramatically increased in all areas. In fact we recently brought the company into talk to the board about progress and they concluded, the company being, that Winn Dixie had made more progress in a short period of time in the customer service attributes, the freshest attributes, all the attributes the customer's looking for in any company they’ve seen in the recent short term. So we’ve made tremendous amount of progress going from a company that was poor to a company that’s good. We wanted to become a company that’s great and we’ve still got a ways to go and some of the companies that they measure as being great, one is our competitor down here Publix, so we have a ways to go to meet them.

But we clearly understand theories that we need to focus on and I think everyone in the company knows exactly where the focus is and where we’re headed so. We’ve made a lot of progress, Meredith. Customer Service is high in everybody’s place and I think we clearly understand that you get there by having the right people.

Meredith Adler – Barclay's Capital

Great, and I have a question for Bennett, back to the 30 stores that you’re closing.

Bennett Nussbaum

Yes Ma'am.

Meredith Adler – Barclay's Capital

Do you intend to pay landlord -- if you can’t sublease the store, will you buy landlords out of their lease or do you intend to just keep paying rent on those stores and you know have you kind of guessed what the dark store rent would be for the stores that you don’t think you’ll sub-lease?

Bennett Nussbaum

Yeah, a couple of things in there, Meredith, those 30 stores are in fact all closed, were closed within -- 29 of them within the first quarter. As you know, we’ve taken a reserve against what we think is the most likely outcome of which ones will be subleased or not and what goes on individually is we will work with each landlord to make the best deal for us whether we can sublease that store to a third party, whether landlords wants to take the store back for some payment, or whether the landlord was unwilling to make a deal in which case we’ll have to pay the rent out over time. So there’s a lot of work to be done, each store is an individual event that has to be handled.

Peter Lynch

Meredith, this is Peter. We’ve seen a lot of activity here so this isn’t something that’s just going to – I don’t think sit around between the subleasing and having landlords take them back. And I also say I’m not going to tell you how many, but there are a number of these that we closed with the anticipation that we’re working with the landlords who redo the center so that we can build a 52,000 to 58,000 square foot transformational store. So there’s a lot of activity with these stores. They’re not just sitting on the shelves, para-stated.

Meredith Adler – Barclay's Capital

Great and then my final question for, Bennett, would be I think you have already said that you don’t expect to be a net borrower in 2011. Just your sort of perspective on the next couple of years, do you expect that you will continue to be in a cash position based on sort of your best guess about capital spending rate now?

Bennett Nussbaum

My best guess is exactly what you said, Meredith, that we will not be a net borrower at the end of this year. Based on the trends we see it’s not unlikely that at some point we’ll go into alignment.

Meredith Adler – Barclay's Capital

Okay, thank you very much.

Operator

Ladies and gentlemen, if you wish to ask a question please press star followed by one on your touch-tone phone. Your next question comes online, Susan Anderson from Citi, please proceed.

Susan Anderson - Citi

Good morning everyone.

Peter Lynch

Good morning.

Bennett Nussbaum

Morning.

Susan Anderson - Citi

Can you talk about I guess maybe the guidance towards the end of the year or maybe what’s driving that. Should we expect to see maybe a pullback on the promotions given kind of where you expect the gross margin at the end of the year?

Bennett Nussbaum

I think you can expect to do two things that I noted before. One, continued improvement in ID sales, particularly as no (burgers) returned for the holiday season and two, we will moderate the promotional spend throughout the year. So between the sales continue to improve, moderation of the expense, and better control over the expenses, we expect to have our guidance between – we continue to reaffirm the guidance between 100 and 130.

Susan Anderson - Citi

Great, thanks, and then I guess let’s talk about inflation for a little bit. It sounds like obviously it’s going to keep coming and the brand it guys are sharing the increase prices now. How has that been in terms of passing it through and whether your expectations as we head into the back half of the year?

Bennett Nussbaum

Well, we measure both the retail pricing inflation and we also measure the product cost inflation. Retail pricing inflation for last quarter was about 160 basis points but product cost inflation was a 180 basis points. So you got a net there of about 20 basis points so we were not able to pass along. We anticipate or keep on hearing that the branded companies will be pushing along some more costs increases and our feel right now is that we think our ability to pass those along should be relatively good. So that’s a favorable look for us.

Susan Anderson - Citi

Great, thanks. That’s very helpful and then just one more question. If you could give me an update on the corporate brands and penetration, where’s it at now? Where do you expect it to go and then are there any new products in the pipeline?

Bennett Nussbaum

Okay, corporate brand penetration – our penetration is slightly better than last year. Okay, so it’s kind of fallen off that big drive that we had a year ago but it is still positive at about 23%. So we’re in that upper core-tile. We’re still improving and in fact I just yesterday had a meeting with our private label. We now call on our Owens Brand’s group and they’ve got a lot of new products on the horizon so we expect another big push on this private label arena.

Susan Anderson - Citi

Great, thanks a lot guys.

Operator

Your next question is a follow up question from the line of Scott Mushkin from Jefferies and Company, please proceed.

Scott Mushkin – Jefferies and Company

Hey guys, thanks for taking some follow-ups from me. I just wanted to know, Peter, and it sounds like you said the combination of the better economy and a better promotional environment will help you in the back half of the year, but where do you think if you step back, where do you think your prices are visa a vi your competitors and your market? I know one of the things that you said I think in the fourth quarter is maybe the spread wasn’t where you needed and it's part of what drove the investments. I was wondering do you think the spread's narrowed due to your activities and where do you think it should optimally be? And then I had a follow up question -- one more on the remodels.

Peter Lynch

Okay Scott, I do see a more favorable environment and hopefully today after the elections, okay, things go the way I think they’re going to go, it’ll be a much more positive environment for the people out there. I think today’s probably going to help people to have a more positive outlook. But relative to pricing, we’ve got a major push on with the pricing group here at Winn Dixie so to clearly understand where we are, competitors to competitors.

The last look that I had, we had improved slightly versus where we were same time last quarter, same time a year ago and the range that we have I feel is just about where we need to be. I feel good about our range with Wal-Mart and for the most part depending upon some local areas I feel good about our range with our competitors. So are we at optimum right now? Maybe there’s a little bit more fine-tuning we can do but we’re fairly close. You know the big importance …

Scott Mushkin – Jeffries and Company

Okay, then my second – I'm sorry.

Peter Lynch

... Scott, is really what’s driving the customer’s today is what they’re seeing in the promotional activity, on the front page of that ad or the back page of the ad, that’s what getting them into the store and then as you know what you do once you get them there with the customer service and the quality and the variety it’s what going to keep them coming back. There’s always going to be that customer for Wal-Mart and the fringe operators that are coming out there. They’re just operating on price but what I clearly found this part year particularly with these transformational remodels, there’s a customer out there that wants a well-run store with great variety, great quality, and they’re willing to pay a little bit more for it. And the good news on that, Scott, is the excellent customers back. I said that almost about nine, 10 months ago. I started to see it all. All our numbers confirm they’re back. They’re spending rates that they’ve spent before and now I think what we’re starting to see is that middle man coming up, starting to move in that direction and again I think hopefully today with the election results and other things, the atmosphere is going to become more positive and hose people will continue to go up there.

Where the challenge continues to exist is middle income and lower; where people are in government assistance and we need to get jobs back for people. When jobs come back, then those groups will start to participate more in buying more and shopping more frequently. So we got half the population back on track. We got the other half that we need to stimulate with jobs and as that happens they get back on track.

That’s my (inaudible).

Scott Mushkin – Jefferies and Company

Okay, that was great color and to tell you truth, especially the stuff about the absolute customer. Then my finally thing is I know you’re doing 22 remodels. You had gone for a while to kind of targeting certain markets. Given some of the brand issues and I think even Meredith talked about this, Meredith, a little bit about 10 minutes ago but I was wondering as we look at these 23 models that are going to be very substantial; costing a lot of money. Are we going to target these in certain markets to try to build a better brand image to Winn Dixie or are they scattered across the store base? And then (inaudible), thank you.

Peter Lynch

Scott, thank you. Scott, they’re clearly targeted to enhance our brand image. In fact, I’m extremely confident they’re going to do that. What I’m not going to do today is tell you what markets I’m going to go into because I’m sure our competitors are dialed in. They’d love to have that information but I can tell you we do our homework. We’ll make sure we’re going to put them in the right place, the right time and they are clearly directed, and will perform in a way that’ll enhance our brand image in every one of the markets that they go in, and the good news is these things are so strong, they’ve got an umbrella effect so it effects not just the store that we put in, but it effects the overall image of Winn Dixie in the areas that we go in.

Scott Mushkin – Jefferies and Company

Thanks.

Peter Lynch

You’re welcome.

Operator

Your next question comes line from Bruce Zesser from Advisor Research, please proceed.

Bruce Zesser - Advisor Research

Thank you. Hi, Peter.

Peter Lynch

How are you doing Bruce?

Bruce Zesser - Advisor Research

Good, I had a question about the Mobile store. When was the renovation in completed there and are you in a position to provide any metrics on before and after remodel sales per square foot?

Peter Lynch

The renovation was completed about five weeks ago. We grand re-opened the thing about five weeks ago, okay. The renovation took a while because there were pieces that didn’t get cleared up until about five weeks. This store is exceeding our expectations. It’s exceeding as of so far what the sales per square foot would be in the leading supermarkets of the United States. Now it’s too early to tell how long that will go for. We’ll continue that way but I’m telling you I’m very, very impressed with the results of this store. This one’s only 42,000 square feet, Bruce, but smaller than Covington or Margate, but the customer’s clearly love this format.

Bruce Zesser - Advisor Research

Okay, and prior to the remodel what would that store do in sales per square foot?

Peter Lynch

You know I don’t have that on the top of my head but I’ll get it to you though it’s probably pretty – it might have been a little bit in better – no actually it wasn’t. IT was probably exactly where the company was at about 300 square foot but we’ll get you that information.

Bruce Zesser - Advisor Research

All right, but give or take – what your saying is the mobile store, you took a store that was about company average in the low 300s of square foot and you made it dramatically better in terms of sales per square foot at least in the first couple weeks is what you’re saying?

Peter Lynch

Actually, in the last probably two months even as we approach the finish of the remodel the sales per square foot grew dramatically and I’m talking dramatic because you know where the industry average is up above 490s so 300 to 490 is a big jump.

Bruce Zesser - Advisor Research

Okay, and what about the two stores on the last call in August you had mentioned that Covington and Margate were doing around $490 a square foot. What are those doing in the first part of this call 11?

Peter Lynch

Well Covington continues to hit or exceed that number. Margate right now, they’re in their slow time of the year because they’ve got the snow bridge down there. So I think we’ll have a better track record on that one when the snow bridge comes back starting actually this week. All though my expectation is it’ll be up there.

Bruce Zesser - Advisor Research

Okay, and then with regard to the balance of the year, can you give any guidance of the number of remodels you’re doing in the current quarter and then in the fiscal third and fourth quarter – how they’re getting broken up?

Peter Lynch

Well we’re still sticking with the 22 that we’re going to do and now with 17 transformational aside -- the regular remodels – and the majority of those will be completed in the fourth quarter.

Bruce Zesser - Advisor Research

Okay, and then the last question I had was kind of bigger picture. IF you look at your performance relative to public on same store sales, you had several quarters in there and particularly in fiscal '09 where you guys were doing really well and publics was struggling and it’s kind of shifted the last three quarters. You’re saying store sales have been down and theirs have been up and I just wanted to get a sense from you why are they winning now and Winn Dixie’s struggling?

Peter Lynch

Well, I think (inaudible) they’re doing better. My suggestion is they have more absolute customers than we do because when they started to struggle was at the time when the economy got real bad, the affluent customer was probably thinking that they lost 40% of their fair market value, their equities up there and they were pulling back. I also think when they had those tough times – this was about the time they picked up the Albertson stores and it could have been a little bad match up there. But you know something, (Bruce)?

The way I look at it, that’s good news. That tells me that the customers are coming back. There’s an opportunity to get those customers and quite frankly if I remember correctly they went negative before we did and they were negative for probably about four or five quarters, maybe six. So I think there’s a lag there. We’re just catching up to them right now. So I think the affluent customer has a lot of to do with it and they’ve got more than we do. I think they probably have something going on with their stores that they bought from Albertsons and quite frankly we are lagging them a little bit and we’re catching up right now.

Bruce Zesser - Advisor Research

Okay.

Peter Lynch

It’s not very often we see this in their numbers. That’s good for us. That means people are out there shopping again.

Bruce Zesser - Advisor Research

Okay, thank you.

Peter Lynch

You’re welcome.

Operator

Your next question is a follow-up question from the line of Karen Short from BMO Capital. Please proceed.

Karen Short – BMO Capital

Hi, thanks. I guess you mentioned this, I just didn’t catch it. So this is curious. In terms of pricing, where do you think you are relative to your competitors and are you where you need to be now and I guess just to clarify is that something you achieved during this quarter, meaning we kind of have to cycle it through all of 11?

Peter Lynch

Well, Karen. We look at it every single quarter and we determine where we want to be and this quarter versus last quarter versus same time last year, we’ve seen improvements versus where we were to our competitors a year ago. I think we’re pretty close to where we need to be. We’ll continue to monitor that but I don’t see any dangers zones here or any place and quite frankly our space between where we are and Wal-Mart is I think as good as most of our major competition and I don’t see any red flags going up there as well so. We monitor on a – I see it monthly. My team sees it weekly. We set up targets where we need to be on those targets and it has improved from last quarter and a year ago.

Karen Short – BMO Capital

Okay, and then just on your stores that are targeting the more affluent customer, can you maybe give some directional commentary on where the comp would be in those stores and just remind me maybe what percent of that store base target some more affluent customer?

Peter Lynch

Well what I’ll tell you is that those stores – and I just went through it last week with Deanne – we see continued progress on picking up market share. Okay, and we look at the sales in those stores they continue to the most part exceed what we’re doing in the chains. So we clearly see that group is back – they’re back on track. They’re buying a way that they were before.

Karen Short – BMO Capital

And would they be positive?

Peter Lynch

It depends upon whether they’ve got a competitive opening or not. I’d have to dig through that whole thing but as that goes store by store, I’ll look at the ones with no competitive openings. They’re positive once they’ve had a competitor that might be negative but we’d have to dig through that whole thing to get it. But all in all, they’re picking up the market share that I saw on the latest trend report and all indications are they’re doing better than the rest of the of the chain.

Karen Short – BMO Capital

Okay, and then just lastly on vendor promotions. Can you just maybe give some color on what you’re seeing from the vendors in terms of promotional programs and willingness to expand programs or maybe decrease or changes in their approach to programs overall?

Peter Lynch

First of all, we’ve got a very good relationship with our vendors between the top-to-top meetings that we have here at Winn Dixie between meetings that we’ve put together with our trade partners out in our stores – meeting with them talking about where we need to go forward. So I think that they’ve been very open to bring us promotional opportunities and quite frankly we continue to challenge them with more opportunities to bring to Winn Dixie. So I’d say that we’re competitive with our competitors on getting what we need to get and we got a philosophy here working with our vendors to make sure that we’ve got a probable sales for them and for us. So I think our relationships are good and if we take advantage of the opportunities that are out there, and I think they bring the opportunities to the table here.

Karen Short – BMO Capital

Okay, great, thanks.

Operator

Your next question comes from the line of Damien Witkwosky of Gabelli and Company. Please proceed.

Damian Witkowsky – Gabelli and Company

Peter, just want to follow up quickly on your comment regarding the snow burg and how that matches up with the more affluent customer coming back and shopping the way they used to. Am I right in assuming that the snowbirds that you’re expecting not to come back arguably more affluent than a customers and is that baked into your sort of projections for the projections for the full year?

Peter Lynch

Yeah, typically the snowballs obviously got a little bit more cash because they’ve got a home up north and a home down south and that is baked into our projections for the second half of the year, actually starting in the second half of the quarter two. I mean this is a process we’ve seen year after year after year. The one year where they didn’t really come down as much was the year with this great recession started and clearly you saw the impact of that affluent customer that either didn’t come down as long or didn’t come down as often. So we expect that trend to improve this year.

Damian Witkowsky – Gabelli and Company

And then in terms of your competition, I don’t know if you have disclosed how many stores are stores that target that more affluent customer, but your main competition is those markets is publics. Is that correct?

Peter Lynch

That’s correct.

Damian Witkowsky – Gabelli and Company

Okay, thanks Peter.

Peter Lynch

You’re welcome.

Operator

Your next question comes online from Meredith Adler from Barkley’s Capital. Please proceed.

Meredith Adler – Barkley’s Capital

Thanks, I just wanted to follow up on that last question about the snowballs I believe what you said is that the 2008-2009 winter sales was particularly weak. Snowballs didn’t come down. I was just wondering when you look at 2009-2010 winter, did you see a full recovery to where it had been or was it partial and does that mean it’s getting better this year or it gets closer to normal, that would be positive to the prior year?

Peter Lynch

It was a partial recovery, Meredith, and our expectations this year should be a better year.

Meredith Adler – Barkley’s Capital

MM-hmm, and then I have a question. We’ve talked a lot about Florida. Can you comment at all about what’s going on in the rest of your geographies – what I think of as the Deep South. The gulf was – clearly the Gulf’s oil spill had an impact. How do things stand now? There is some I guess some snowballs in that area too. You think that’s going to come back and what’s the competitive environment like here?

Peter Lynch

Well, on the Gulf Shores area, we were clearly impacted during the summer season with the oil in fact. In my latest business down there you wouldn’t know there was ever oil damage to beaches, etc, etc. So our expectations is that should be a positive force of with snowbirds coming down their areas like Destin, etc, during the holiday periods and quite clearly that’s going to be a huge upside for us in ID sales when we get into next springs and next summer. SO that is improving and I have big expectations that that’ll be a big help for us. When you get over to New Orleans, I think I said this in one of the past calls. New Orleans was never affected by as high unemployment as what you saw over in the Florida area.

Florida is all somewhere between 10, 12, and 14%. New Orleans is roughly in the 6% areas so that work forces remains more stabilized. The only thing that we’ve seen in New Orleans, Meredith, is the fact that after Katrina, Winn Dixie was one of the first retailers to go back there and rebuilt our stores and we had a big upside the first couple of years but ever since then is – Wal-Mart and other people have started to come back and increase the amount of retail square footage. SO that’s been a challenge for us in New Orleans. Having said that, we launched our field program there last quarter and we’re feeling really good about the results in New Orleans with our additional promotional with the field (inaudible) program.

Meredith Adler – Barkley’s Capital

Now I other question about Wal-Mart. I had heard from other retailers that when they tried to be a promoter it was obvious that it wasn’t that exceptional but it was quite disruptive. Do you feel like their decision to go back to EDOP is actually going to just sort of by itself calm down those competitive environment?

Peter Lynch

I clearly see a common to a competitive environment because what they did was disruptive to the food retailers. In our business a lot of people react real quick when they see things and what Wal-Mart had done back in the spring really had a bunch of retailers running and jumping in doing different things, either promotional with their ads or with their everyday pricing. We saw a combination of both. I think they’re going back to their everyday low price while normalizing environment of for us other retailers. So it’s a positive for us.

Meredith Adler – Barkley’s Capital

Great, thank you very much.

Peter Lynch

Thank you.

Operator

Ladies and gentleman, this concludes the question and answer portion of the call. I would now like to turn the call back to Peter Lynch for closing remarks. Please proceed, Sir.

Peter Lynch

I’d just like to kind of thank everybody for turning in and for supporting us. In conclusion, I just want to say that we did in Q1 an exact (inaudible). I can clearly say we’ve improved our sales. We clearly say we’d invest in margins to improve those sales and we clearly said we would be slightly negative going into the first quarter. That happened, however we have reaffirmed our guidance. We show we’re on track and feel the issues we have done have produced positive results in sales entering into the rest of the year. Thank you for joining us.

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Source: Winn Dixie Stores CEO Discusses Q1 2011 Results - Earnings Call Transcript

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