Winn-Dixie: Where Has All The Money Gone?

Nov.25.11 | About: Winn-Dixie Stores, (WINN)
In November of 2006, Winn-Dixie (NASDAQ:WINN) emerged from chapter 11 by raising approximately $600 million in its IPO (a large portion of that was used paying back debtors) by selling approximately 56 million shares near the $11 mark. Since then, the company has done a decent job of producing positive cash flow for its owners. In fact, since its IPO, the grocer has produced EBITDA of $587 million, including a EBITDA loss of $27.8 million in fiscal 2006 (a partial year) and $7.40 million gain in the first quarter of Fiscal 2012.

Instead of returning any of this cash flow back to shareholders in the form of cash dividends or a stock buybacks, the Board of Directors has elected to utilize the cash flow to remodel stores and support other capital projects. This is all well and good, if it translates into shareholder value, but in reality, after nearly six years, the supermarket operator’s market cap is now about one-half the amount it was when it began operations post chapter 11.

Simplifying the math: If you had opened up a bank account in 2006 with an initial deposit of $600 million, and during the past six years accumulated another $600 million worth of cash flow, theoretically that bank account should enjoy a balance of nearly $1.2 billion, not the $300 million representative of WINN’s current market cap.

Mr. Market, in essence, is saying that the initial valuation of WINN should have been a negative $300 million versus $600 million- if my arithmetic right. The point is, you start out with $600 million, earn another $600 million on top of that that, and then the market’s voting machine insists you are only worth 25% of that amount, is logic that simply does not compute. To many shareholders, this scenario is nothing less than outrageous, to others, their perception is,“business as usual”. In my humble opinion, being complacent and apathetic about your investments is foolhardy -- if you think something is not right, take an activist role in trying to fix it.

What the company should do: Since it enjoys the luxury of being debt free and holding $168.5 million cash in its coffers, it has the flexibility and ability of buying some of its shares back and instilling confidence in the market place (if WINN thinks its shares are undervalued, the market should also). If WINN reduced its store remodeling allocation a mere $25 million, from $125 million to $100 million in fiscal 2012, and used that $25 million difference to repurchase its own shares in the open market, that alone, would be enough to reduce its outstanding shares by nearly 10%. This type of action would send a resounding message to Wall Street that this is a company to be reckoned with. The adoption of a stock buyback plan at this juncture, is one of the biggest “no brainers” of all time, as it will essentially put "lost money" back into shareholders' pockets.

Disclosure: I am long WINN.