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On the surface, Winn Dixie Stores (NASDAQ:WINN)’s first quarter earnings results were nothing to brag about, in fact, some would argue they were downright ugly. But for those willing to put their investment detective hats on, there are some definite signs of resurgence budding. The fact that the Grocer showed a 2.2 % increase in sequential same store sales is encouraging, especially since the bulk of its gains were due to a higher transaction count, rather than a beefier basket size.
Management shows optimism: It has been a very long time since Management has been so chipper on a conference call. Phrases such as, “guidance is being maintained”, “we expect profitability to improve” and our “second quarter EBITDA will turn positive” were surprisingly present. Management stressed that the top half of its customer base has returned (the most affluent) and it is looking for improvement in the lower wage classes, once the job outlook improves.
Improvement needed: WINN’s Gross profit margin needs help. A 100 basis point drop from 28.4% to 27.4% was certainly disappointing and needs immediate attention to reverse the trend. Another area of concern was the company’s Operating & Administrative expenses category, which shot up $10 million on an absolute basis from $450 million to $460 million, equating to 29.8% of sales versus 28.5%.
The future: Positive things are transpiring, such as recent corporate staff reductions coupled with the closing of thirty underperforming stores. These changes are anticipated to generate $12-17 million per year in annualized savings. An $80 million store remodel budget should help bring in more customers, while the emergence of food inflation, adds icing to the cake.

The company expects that it will generate $100-130 million of EBITDA in Fiscal 2011, but that could be too conservative, as Wall Street seemed to be more than enthused with the Supermarket chain’s first quarter results, by furiously adding 10% to its already beaten down share price. I would not be surprised to see the stock challenge the $10 vicinity by year’s end, especially with the help of some short covering.
The possibility of the introduction of a cash dividend, a stock buyback program or both, could energize the share price further, while the fact that the company is selling at half its book value, has no debt and a nice cash hoard, makes it susceptible as a takeover play by the “piranhas” of the Private Equity world, or by a larger competitor such as Kroger (NYSE:KR), Safeway (NYSE:SWY) and Wal-Mart (NYSE:WMT).The tunnel is long and dark, but the light is certainly visible for those value investors willing to search it out!

Disclosure: long KR, SWY, WINN and WMT

Source: Winn Dixie: A Light at the End of the Tunnel?