Winn-Dixie F1Q08 (Qtr End 9/19/07) Earnings Call Transcript

| About: Winn-Dixie Stores, (WINN)

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

F1Q08 Earnings Call

October 29, 2007 8:30 am ET

Executives

Sheila C. Reinken - Vice President -Finance, Treasurer

Peter L. Lynch - President, Chief Executive Officer,Director

Bennett L. Nussbaum - Chief Financial Officer, Senior VicePresident

Analysts

Karen Howard - Lehman Brothers

Mark Husson - HSBC

Charles Cerankosky - FTN Midwest Research

Karen Short - Friedman Billings Ramsay

Justin Putnam - Covelli & Company

Jim Lane - Tri-Asset Management

James Adams - Copia Capital

Operator

Good day, everyone. Welcome to the Winn-Dixie Storesquarterly earnings call. Today’s call will begin with some remarks byWinn-Dixie senior management and will conclude with a question-and-answerperiod. At this time, I would like to turn the call over to Ms. Sheila Reinken,Vice President of Finance and Treasurer for Winn-Dixie. Please go ahead, Madam.

Sheila C. Reinken

Thank you. Good morning and thank you for joining us for ourdiscussion of Winn-Dixie's financial result for the first quarter of fiscal2008. I am Sheila Reinken, Vice President of Finance and Treasurer. Joining metoday are Peter Lynch, Chairman, CEO, and President; Bennett Nussbaum, SeniorVice President and Chief Financial Officer; and Eric Harris, Director ofInvestor Relations.

Before we continue, I would like to let you know thattoday’s call is being recorded and a transcript will be archived. A replay ofthe call will be available on the investor relations section of our website,www.winndixie.com.

The information presented and discussed today includesforward-looking statements which are made under the Safe Harbor provisions ofthe Private Securities Litigation Reform Act of 1995. The risks anduncertainties related to such statements are detailed in our SEC filings.

Peter and Bennett will provide some prepared remarks andafterwards, we will open up the call for your questions.

Now it is my pleasure to turn the call over to Peter Lynch.

Peter L. Lynch

Thank you, Sheila and good morning, everyone. Let me startoff by saying that I am very pleased with the results the team has achieved inthe first quarter. As you know, we are still in the very early stages of amulti-year turnaround and we have a lot of work still left to do, but ourstrategic initiatives are progressing on plan and I am proud of what the teamhas been able to accomplish thus far.

This is the third consecutive quarter that we have deliveredpositive adjusted EBITDA and improved gross margin, while also generatingpositive identical store sales. First quarter adjusted EBITDA was $19.5million, an increase of $30.6 million over the same period in fiscal 2007. Mostof the improvement in adjusted EBITDA resulted from generating higher grossprofits on sales.

As a percentage of net sales, gross margin was 27.5%, anincrease of 110 basis points from the first quarter of fiscal 2007. We achievedthis increase in gross margin through a planned reduction in promotionalspending activities and operational improvements, which reduced costs at ourdistribution facilities.

Going forward, we will continue to fine-tune our promotionaland merchandising activities to achieve the right balance of sales growth andmargin. We have excellent systems in place which are giving us comprehensivedata and strong visibility into the business. This enables us to be betterneighborhood merchants and to focus our promotional spending on specificmarkets, so that we can allocate our resources to those markets that need itthe most.

Moving on to sales, identical store sales increased 20 basispoints in the quarter. Comparisons of ID sales to last year were impacted thisquarter by two significant items: one, the mix shift in pharmacy sales frombranded drugs to generic drugs, which had a negative impact of approximately 60basis points; and two, in the prior year quarter one, there were increasedsales due to Hurricane Ernesto. This had a positive impact year ago of 20 basispoints in the first quarter of fiscal 2007. The combination of these twofactors impacted our year-over-year comparison by approximately 80 basispoints.

It is important for you to note that the generic drugs aremore profitable to the business than the branded drugs and the negative impactof mix shift only impacts identical store sales and not earnings.

In summary, we are on plan with our long-term initiativeswhich will build the foundation for our future growth and we are generatingpositive cash flow from operations. I am very optimistic about the future ofour business.

As I have said many times, our number one priority isgrowing profitable sales. The centerpiece of our long-term strategy is ourstore remodeling program. For us to compete effectively, Winn-Dixie needsclean, modern stores where we can deliver great perishable and non-perishableproducts in an attractive setting, which will enable us to grow salesprofitably.

Remodeling stores is not just about new paint and polishfloors. When Dixie did that in the past, we are now executing a multi-yearinitiative to completely revamp and modernize our stores. I should also notethat this is not a one-size-fits-all approach. Our remodels are specificallytailored to our markets so that we can implement our neighborhood marketstrategy.

For example, in Hispanic markets we have added additionallinear square footage to accommodate and expand selection of our hot foods. Inresort areas, we are creating large center aisles to offer customers seasonalvacation items. We are implementing these types of neighborhood specificstrategies at remodeled stores across our footprint, and it is clear that ourcustomers are responding.

Since the inception of our remodel program in fiscal 2007,we have completed a total of 30 remodels. Nine are still in the grand reopeningphase and are not included in our report results. Of the remaining 21 stores,the weighted average sales lift for the 12 offensive remodel stores was 15%after the grand reopening phase. The sales lift in the offensive remodelsresulted in increases in both transaction count and basket size of 8.6% and6.1% respectively. The adjusted weighted average sales lift for the ninedefensive remodeled stores is 11.2% after the grand reopening phase.

Our target is to achieve a minimum 10% aggregate adjustedsales lift at the remodel stores. We are very pleased to have exceeded thattarget as of the end of the first quarter, with a weighted average sales liftof 13.3%. These are still early returns; however, the trends are veryencouraging.

We continue to expect our store remodel program to be aprimary driver of sales and traffic increases as we move forward. Importantly,we are getting more than just positive sales growth. In the remodels we havecompleted, we achieved about a 2 percentage point shift of sales fromnon-perishables to perishables, and perishables generally produce higher grossmargins than non-perishables.

We are on track to meet our goal of remodeling a total of 75stores this fiscal year and we currently expect 80% of those remodels to beoffensive.

By the end of the fiscal year, we will have remodeledapproximately 18% of our store base. Our current plan is to remodel roughlyhalf of the chain by the end of fiscal 2010. However, I want to assure you thatas important as the remodels are, we are not neglecting the rest of our storebase. We know how important it is to continually improve our competitiveposition and we are taking appropriate actions. We are enhancing those storesnot slated for remodel in fiscal 2008 and investing in better training for ourassociates in order to improve the shopping experience across the entire storebase.

Our goal is to deliver a shopping experience throughout thechain that is clean, fresh, friendly, and local. Now let me comment on ourfinancial outlook for the remainder of the year. First, let me remind you thatwe are still in the initial stages of a multi-year turnaround and that presentsa challenge when forecasting financial results. Nonetheless, the outlook wehave provided today represents our current expectation.

I also want to note that the second quarter hastraditionally been our weakest quarter for EBITDA due to the holidaypromotional activity that the company has conducted historically. We will beadjusting these practices over time but it will be a gradual process. As aresult, we expect adjusted EBITDA inthe second quarter of fiscal 2008 to be lower than in the fourth quarter;however, higher than the company achieved last year. With that in mind, weexpect adjusted EBITDA in the range of $90 million to $115 million for fiscal2008.

Now I would like to turn it over to Bennett to review thefinancial results in more detail. Bennett.

Bennett L. Nussbaum

Thank you, Peter and good morning, everyone. Before I beginmy review of our operating results, please keep in mind that fresh startreporting was required upon our emergence from Chapter 11 and accordingly, thecompany’s consolidated financial statements for periods prior to November 16,2006, are not comparable to consolidated financial statements presented on orafter November 16, 2006. Additional details about the fresh start accountingtreatment are also provided in the 10-Q.

I will start with some key P&L items for the fiscal 2008fourth quarter ending September 19, 2007, which was a 12-week period. As Petermentioned, ID store sales increased by two-tenths of a percent in the firstquarter compared to the first quarter of fiscal 2007. The two key metrics thatdrive ID sales results are basket size and transaction count. The averagebasket size increased 2.2% in the first quarter but was offset by a decrease intransaction count of 2.0%.

We are addressing the transaction count decline with ourstore remodeling program, the revitalization of our corporate brands program,and by investing more capital in our existing stores. We believe that these keyinitiatives will improve the negative transaction count and overall ID salesover time.

Our gross profit on sales increased $21.9 million, comparedto the same period last year. As a percentage of net sales, gross margin was27.5% and 26.4% for the 12 weeks ended September 19, 2007 and September 20,2006 respectively. This gross margin improvement of approximately 110 basispoints was due primarily to planned reduction in promotional spending, whichaccounted for 80 basis points of improvement in the current fiscal year, andoperational improvements which reduced costs at our distribution facility andadded another 30 basis points.

Operating and administrative expenses for the first quarterdecreased $8.7 million as compared to the same period last year. In the prioryear period, two items occurred that increased income by $2.6 million. Thesewere $5.9 million of income related to favorable vacant store lease buy-out,offset by $3.3 million of costs related to retirement plan that was cancelledupon emergence from chapter 11. Excluding these items, the decrease inoperating and administrative expenses in the first quarter of fiscal 2008 wouldhave been $11.3 million.

Several items contributed to the decrease in the firstquarter of fiscal 2008, including a reduction of $6.6 million of depreciationand amortization, caused primarily by lower aggregate asset values due to freshstart reporting evaluation, $4 million resulting primarily from lower insuranceexpenses, and miscellaneous items totaling about $700,000.

Our net operating loss carry-forward for federal income taxpurposes, or NOL, as it is commonly referred to, is approximately $495.5million as of September 19, 2007. We anticipate an increase in our NOL as wesettle the remaining outstanding bankruptcy claims and distribute approximately7.9 million additional shares of our stock. This increase will be determinedbased on the then-current market value of our stock at the time theseadditional shares are distributed. As we have noted previously, the 7.9 millionshares are included in the 54 million shares we have outstanding.

As we noted on the last call, on our 2007 federal taxreturns we filed in March, we anticipate making an election that will allow usto utilize fully our NOLs to offset our taxable income as we generate it.

Let’s move on to the balance sheet. As of September 19,2007, Winn-Dixie had $598.4 million of liquidity, consisting of $207.4 millionof cash and cash equivalents, and $391 million of borrowing availability underour credit agreement.

Our liquidity increased by $5.5 million from the end of thefourth fiscal quarter, primarily as a result of cash flow from operations andworking capital improvements, largely offset by capital expenditures.

We anticipate that our liquidity will decrease during theremainder of fiscal 2008, primarily due to increased capital expenditurespartially offset by anticipated cash flows from operations, including workingcapital improvement.

Capital expenditures in fiscal 2008 are expected to totalapproximately $250 million, of which $140 million is budgeted for the storeremodeling program. We plan to remodel 75 stores this fiscal year at an averagecost of approximately $1.9 million per store.

The remaining approximately $110 million in capitalexpenditures in fiscal 2008 will be used primarily for maintenance and otherstore related projects, information technology projects, new stores, and back-upgenerators and logistics.

Now, let me review the results of our remodel program. Asyou know, we have two types of remodel, offensive and defensive. The offensiveremodel are in stores that currently face direct competition but are notexpected to face new competitive openings this fiscal year. The weightedaverage sales lift for the 12 offensive remodeled stores is 15%. The sales liftin the offensive remodels results from increases in both transaction count andbasket size of 8.6% and 6.1% respectively.

We also conduct defensive remodels to address newcompetitive openings taking place this fiscal year. When analyzing the impactof offensive remodels, the company’s calculation of sales lift also includes anadjustment based on management’s assessment of the estimated sales impact ofnew competitive openings in the operating region. We call this adjusted saleslift. This assessment is based on the historical impact of competitive openingsagainst non-remodeled Winn-Dixie stores. The adjusted weighted average saleslift for the nine defensive remodeled stores is 11.2%.

As Peter noted, 80% of the remodels we plan to conduct thisfiscal year are offensive. We are very encouraged by both the initial resultsand sales trends of the offensive remodel and we will continue to update you onthe progress of that program.

Although we have seen encouraging results overall on apositive sales lift from our offensive remodel, the impact on our bottom linemay not be apparent to you right away. In fact, the improvements resulting fromthe fiscal 2008 remodels will not be apparent on the bottom line until thefirst half of fiscal 2009.

This is for two main reasons. First, the bulk of our fiscal2008 remodels will be completed in the second half of the year. Second, thereare one-time costs associated with the reopening of the stores that willtemporarily offset the incremental EBITDA from the sales lift we expect toachieve. Once we get past the period in which we incur these costs, you canexpect to see the benefit of the increase in sales flow down through theP&L.

Now, let me hand it back to Peter. Peter.

Peter L. Lynch

Thanks, Bennett. I want you to all know that we greatlyappreciate your interest and your support. In summary, we had another excellentquarter. We have the right plan in place, supported by dedicated associates,loyal customers and supportive vendors. We are executing on a series ofinitiatives that will position our customers at the center of everything we do,and we have a strong senior management team that knows how to execute our plan.

Thanks again for joining us this morning and Operator, weare now ready for the Q&A session.

Question-and-AnswerSession

Operator

(Operator Instructions) We’ll take our first question from KarenHoward with Lehman Brothers.

Karen Howard - LehmanBrothers

Good morning and congrats on a great quarter. I waswondering if you can give an update as far as your thoughts on the timing ofpromotional spend. I know you’ve been ratcheting it down. Does it come along withwhen you actually finish the remodels or is it just going to be for the timebeing until you get some traction there, lower promotional spend?

Peter L. Lynch

In regard to the remodels, the promotional spend starts whenwe complete that remodel and the heavy spend is for the four weeks followingthat remodel.

Karen Howard - LehmanBrothers

And amongst the rest of the store base, is it just thethought that it doesn’t necessarily make sense to be that promotional right nowbecause of the condition of the stores?

Peter L. Lynch

For the rest of the store base, Karen, we promote on aweekly basis, depending upon competitive activities, depending upon the season,whether it’s Thanksgiving, et cetera, so we take the rest of the chain on aweek-by-week basis and evaluate how much spend we are going to do. And then asI said, for the remodel stores, the heavy spend is done at the completion ofthe remodel, so we have a celebration and invite the customers to come backwith us again and get the store kicked off.

Karen Howard - LehmanBrothers

Great. Thanks. Looking at the perishable mix, I know you’vebeen sprucing up the stores even before they get remodeled and improving thequality of the product there. I was wondering if you saw an increase in theperishable mix in the non-remodeled stores as well.

Peter L. Lynch

Karen, even the non-remodeled stores, as we started to addsome small capital and as we’ve redone the departments such as produce, we haveseen an increase, a slight increase, in the change in mix from non-perishablesto perishables.

Karen Howard - LehmanBrothers

Can you quantify that?

Peter L. Lynch

That’s a good thing for us, by the way.

Karen Howard - LehmanBrothers

Of course, of course. I was wondering if you could actuallyquantify what the [lift] has been and what the opportunity could be before youundergo the full remodels.

Peter L. Lynch

I don’t have the exact number but I think Eric can get backto you with that. And as far as what the opportunity is, well, you can see thatwe’ve had over a 200 basis point swing in the remodeled stores, so I thinkthat’s a target that we want to shoot for and perhaps there’s even more upsideon that as we get better at it.

Karen Howard - LehmanBrothers

Great. And when you look at the comps of the remodeledstores, I know it is still pretty early, but have you -- the ones that havebeen done for a quarter or two quarters now, have you seen -- has it maintainedthat 15% on the offensive comps?

Peter L. Lynch

Well, for a number of those stores that we gave you, they’vebeen beyond the quarter and obviously they are coming up with that 15%, soagain it’s early in the game but so far, so good.

Karen Howard - LehmanBrothers

And I was just wondering, with the EBITDA that you reportedtoday, was that in line with your expectations or above what you were initiallythinking you would be able to do when you reported the fourth quarter?

Peter L. Lynch

I don’t think we typically give that guidance out there, butwhat I do want to say is I felt very, very good about our performance in thefirst quarter.

Karen Howard - LehmanBrothers

Great. Thanks so much.

Operator

We’ll go next to Mark Husson with HSBC.

Mark Husson - HSBC

Good morning. I just wanted to ask a -- step back a second.I mean, I think from our point of view, your job is to try and get your storefleet remodeled and get the thing rebranded properly before competitionswallows up the older stores, so it’s a bit of a foot race. I mean, you maycharacterize it differently but if you look at the non-remodeled stores, couldyou just sort of talk about the general trend there and whether or not your --the in-store merchandising that you are doing and the reduction in promotionalactivity is kind of helping or hindering. If you’re a local store manager, howdo you feel about the changes?

Peter L. Lynch

I think you’re totally right, Mark. Obviously we’re tryingto get these things remodeled and repositioned as fast as we possibly can. Ithink, quite frankly, there’s a mixed reaction out there. In some of the storeswhere we have not done remodels but we’ve been able to enhance themerchandising in the store and perhaps in some cases, even change some of theteam around in the store, we’ve had some very good success. So it’s a mixed bagout there, and obviously the ones that are not moving the needle as fast asthey should be, those are the ones that as we go through this evaluation ofwhich stores are next to be remodeled, we put them into that equation.

So in some cases, I’m feeling pretty good about it. Othercases, we need to probably make sure those stores get into the remodel processas soon as they possibly can because they are just old and tired. They needhelp.

Mark Husson - HSBC

Yeah, and then just on the calculation for the adjustedsales lift, just so I kind of understand where you are coming from for thedefensive remodels; so if you had a store open against you and let’s just saysales were going to be down 10% let’s say historically, but actually because ofthe remodel, sales are up say 1%. Is that how you would get to the 11% orsomething, whatever it was, for the defensive remodels?

Bennett L. Nussbaum

That’s essentially exactly correct, Mark. Basically, we havea pretty good database about when a specific competitor opens at a specificdistance from one of our stores, so we have a pretty good idea from historyabout how that store will be affected. And the reason we do a defensive remodelis we have a very good store that may be old and tired but it’s profitable andwe can get a very good return on our investment by doing that defensiveremodel.

Mark Husson - HSBC

Okay, and if you look at your store fleet now, and you havelimited visibility going forward but you’ve got I guess reasonable over thenext 12 to 24 months of how many stores you are expecting to get hit bycompetitive openings, the percentage of defensive as opposed to offensiveremodels that you think you are going to do going forward, how is that lookingand how does that develop over time?

Peter L. Lynch

I think as I indicated on the call that 80% will be of theoffensive type going forward this year right now.

Mark Husson - HSBC

Oh, I thought that was backward-looking. So that’sforward-looking, is it?

Peter L. Lynch

That’s forward-looking.

Mark Husson - HSBC

Okay, so 80-20, and in terms of return on invested capital,do you get a better return on the defensive ones or the offensive ones? I meanreal return, not return relative to where it would have been if you hadn’t doneit.

Bennett L. Nussbaum

Well, we look at the return versus what the store would havedone had we not remodeled it and we rate them all on the same return oninvestment scale and that directs how we go at it. So we don’t look at adifference in the cash-on-cash return against the investment in either type ofremodel. They’re identical.

Mark Husson - HSBC

Okay, but for investors looking from the outside in, they’drather have I think offensive, proper cash-on-cash returns to grow the returnsinside the business in terms of dollars, rather than having a return against afalling quantum dollar number.

Bennett L. Nussbaum

I can tell you that the investors wouldn’t want our baseprofitability eroded by us not taking the time to take a very profitable storethat may be a little dated and remodel it in the face of competitors. We’vebeen able to keep several stores very profitable by doing that and avoideddiminution [in the dock] thereby.

Mark Husson - HSBC

I think that’s absolutely a fair point. What I’m trying toget at, I suppose is, as an investment, this is a -- it’s a combination of adefensive investment and an offensive one, and I suppose growing quantumdollars in an absolute sense is what equities is all about.

Bennett L. Nussbaum

I think what you have to look for is that we’re notdisagreeing with you in that we expect 80% of our remodels to be offensive. Butthere’s the occasional time when it just makes a lot of sense to do thatdefensive remodel. But to your point, we are trying to do the vast majority ofour remodels on an offensive basis.

Mark Husson - HSBC

Great. Thanks so much.

Operator

We’ll go next to Chuck Cerankosky with FTN Midwest Research.

Charles Cerankosky -FTN Midwest Research

Good morning, everyone. I was wondering if you could firstgive us an idea what kind of inflation you saw during the quarter and maybeyour six-month outlook for it, Peter.

Bennett L. Nussbaum

As we evaluate the inflation we’ve seen coming in to ourstores, we think it’s in the 2% to 3% range, and we believe that will continueprobably for the next quarter, at least.

Charles Cerankosky -FTN Midwest Research

All right. When you are putting together that EBITDAguidance you gave us, what kind of sales growth is it based on?

Bennett L. Nussbaum

I believe what it says is somewhat positive for the balanceof the year, for the full year.

Charles Cerankosky -FTN Midwest Research

By somewhat positive, would you say in line with the firstquarter results?

Peter L. Lynch

Chuck, I’d say in line with the first quarter results.

Charles Cerankosky -FTN Midwest Research

Okay. When you look at the first quarter and the amount, youpared back some of the promotional spending. How do you react to the sales thatresulted from that? Was it what you expected, a little worse, a little better?

Peter L. Lynch

We take that on a week-by-week basis and quite frankly, someweeks it was a little bit worse and we continue to fine-tune this thing as wemove forward.

Charles Cerankosky -FTN Midwest Research

Thank you very much.

Operator

We’ll go next to Karen Short with Friedman Billings Ramsay.

Karen Short -Friedman Billings Ramsay

Good quarter. Just to follow up on the remodels again, doyou have a sense of the 20% that are defensive, do you know how many or whatpercent of those remodels would be against say a super center versus aconventional operator?

Peter L. Lynch

I don’t have that one off the top of my head but I wouldsuspect at least half of them, but I don’t have the -- we’ll get back to you onexactly what that was.

Karen Short -Friedman Billings Ramsay

Okay, and then I guess also, I kind of wanted to follow up alittle bit just on the environment. Maybe you could just make some comments onwhat you are seeing in terms of the competitive environment in Florida andconsumer behavior in terms of trading down or trading around?

Peter L. Lynch

Well, you guys have read everything about the declining inhouse sales here and the increases in fuel, and obviously that’s had some typeof impact on the consumer. One could be optimistic and say that maybe they’removing from the restaurants to the meals at home. But I think it has softenedour sales.

Regarding our competitors out there, there is one marketwhere there’s a little bit of activity and that’s Tampa-St. Pete. I’ve talkedabout that before and you’ve got some activity going on between Suite Bay and Albertson’s and others,including ourselves, in that market.

Karen Short -Friedman Billings Ramsay

Okay, and then maybe Bennett, I don’t know if you canelaborate on this -- I mean, do you have some sense of what the returns areright now or where they are trending on the remodeled CapEx? Do you have likean ROIC type of gauge?

Bennett L. Nussbaum

Actually, we look at that every period and most of ourremodels are trending right on our pro forma.

Karen Short -Friedman Billings Ramsay

Okay. What was the pro forma?

Bennett L. Nussbaum

Well, we look at basically as much as ROIC, we look atcash-on-cash return and we look for anywhere from a three to five-year cashpayback.

Karen Short -Friedman Billings Ramsay

And they are trending along those lines so far? Okay. Andthen I guess just lastly, I don’t know if you talked about this, but obviouslyyou have your loyalty card data that you can use to tweak your offering. I justwas wondering what the loyalty card data was telling you maybe about thesecondary shopper at your remodeled stores. Are you seeing any improved trendsthere or anything you could elaborate on?

Peter L. Lynch

Karen, we look at the loyalty card as a competitiveadvantage, because quite frankly, there aren’t that many of our competitorsleft that have the card. And when you go through a turnaround, it’s veryimportant to understand not only your existing customers but more importantly,understand the ones that left you and try and figure out why.

And what we are now seeing is that we are getting a returnfrom those customers who have left us previously, and that’s been -- and yousee that in the numbers that I gave you with the remodel stores with thetraffic increasing, so the data’s good, the data’s enabled us to reach out tothose consumers that left us and to bring them back into the fold, so I see itas a positive.

Karen Short -Friedman Billings Ramsay

Okay, great. That’s all I have. Thanks.

Operator

We’ll go next to Justin [Putnam] with [Covelli] &Company.

Justin Putnam -Covelli & Company

Yes, I was wondering, you were talking before about --

Peter L. Lynch

Justin, could you speak up a little bit?

Justin Putnam -Covelli & Company

Sorry, I was wondering if you could talk a little bit moreabout the reduction in promotional spending that happened year over year. Iwould have thought that may have gone up a little bit with the more remodels.

Peter L. Lynch

Well, we are spending for the remodels but we took -- one ofthe issues, quite frankly, that Winn-Dixie had was, how to call it, a lack ofbalance in the promotional spending. And what we are trying to do is balancethe stock and make sure that we are not doing unprofitable promotionals out there.Because what we want to do, as I talk about all the time, we have to haveprofitable sales going forward.

We’ve got some very, very good measurements into exactlywhere we spend, whether it’s on coupons or a deep dive into some of the itemsthat we are promoting on, and we’ve got a better understanding of where we needto spend so we can drive the profits of the company and balance that withsales.

We did that fine-tuning through quarter one. We’re going todo some more during quarter two. I think we had it pretty much underway thesecond half of last year, which I felt good about. It was the first half ofthis year that was kind of we’re skating on new ice. But I feel good about whatwe did in the first quarter and I think we’ll even get better at it in thesecond quarter.

Justin Putnam -Covelli & Company

Okay, so these are little incremental improvements asopposed to one big change that you made, right?

Peter L. Lynch

Correct.

Justin Putnam -Covelli & Company

All right. Thank you. That’s all I have.

Operator

We’ll go next to Jim Lane with Tri-Asset Management.

Jim Lane - Tri-AssetManagement

Good morning. Can you hear me okay? First things first, theincremental detail on the store remodels. I think that’s very helpful.

I had four things I was hoping you could touch on; one, assuccessful as you all have been historically in your careers, I was wonderingif you could talk a little bit about people recruitment, because obviously toget this turnaround towards industry margins, you are going to have to recruitfrom within the industry successful people that can execute your plans. Sothat’s the first thing.

I think secondly, I was hoping you could talk aboutopportunities for working capital improvements. I’m sure when the company wasin bankruptcy or under the protection of bankruptcy, terms with vendorsprobably weren’t as attractive as they potentially could be. What’s theopportunity on the balance sheet for that?

And then lastly, I know there’s been a lot of questionsabout the near-term and EBITDA this year and so forth, but I was hoping you,Peter, could give us a picture or your view at this point, based on your othercareer experiences, whether or not looking three to five years out, you thinkwith our asset base we could be at industry margins.

Peter L. Lynch

Let me start with the first one. The second one I’m going togive it to Bennett. I’ll come back on the third.

You are absolutely right. With a turnaround of thismagnitude, people are very, very important. I’ve talked about that my wholecareer. In fact, at the end of the day, Jim, it’s all about people. You mighthave heard that last year we put together a program of recruiting managers,store managers from throughout the industry and we had a lot of success withthat. We brought on board over 75 store directs from very successful companiesall throughout America. So I think that speaks volumes to one, we recognize theneed, but two, more importantly, that people are willing to come and they arehearing that Winn-Dixie is a great place to work. In fact, I left one of ourstores in Miami last week and the manager told me he had just come to us andjoined us from Jewel-Osco, as a matter of fact, and he said to me Peter, I justmoved my family 2,000 milesbecause I’ve got a lot of faith in you and the management team.

So they are coming. We are actively doing that again thisyear and we’re bringing people from different companies throughout America. Soyou are right -- it’s working for us, we’re going to do more of it, but on topof that, Jim, we’re also spending a lot of money to train and develop ourexisting people. That was a program that was not really engaged here very wellin the old Winn-Dixie and now in the new Winn-Dixie, we’re doing a lot oftraining to develop people.

I really believe the combination of the two will provide uswith the right team going forward.

Your second question on working capital, I’ll give that oneto Bennett.

Bennett L. Nussbaum

We’re very interested in improving our liquidity throughworking capital improvements and I’m glad you asked that question. As you said,during bankruptcy we had to do a lot of work to regain our liquidity,particularly our trading terms, and fortunately most of our vendors were verymuch behind us and over the course of the bankruptcy, we were able to reallyget our liquidity back in shape, but probably not all the way to [inaudible].Now that we’ve been out of bankruptcy for three full quarters and our EBITDA,adjusted EBITDA, our sales, our margins and frankly our continuing liquidityhas been strong, I think we can get even better backing from our vendors.

And so we have a program underway to increase our liquidity.Now, there’s several areas which we are looking at. One, of course, is purevendor terms, as you mentioned. Another is taking some of our receivables andmaking them liquid. As you know, we still have substantial tax receivables thatwe will try and work out with the government and receivables left frominsurance companies from Hurricane Katrina losses, which are yet to benegotiated, as well as we have substantial letters of credit now backing ourworkers’ comp obligation.

So we are working all of those fronts to improve ourliquidity and keep the company strong.

Peter L. Lynch

And Jim, regarding your last one regarding EBITDA and beingable to approach industry levels, I think we’re early in the game right now.Obviously I gave you the 90 to 115 for this year. Obviously I wouldn’t be hereif I didn’t think that we could move this thing up over a period of time. Soobviously the goal is to try and get there. Whether we will or not, I’m notsure yet but I know the plan we put in place should clearly directionally moveus upward as we move forward.

Jim Lane - Tri-AssetManagement

Okay, if I could just ask two quick follow-ons; one is, onthe people item, given the investment in training and the high level of valueyou are putting on the human resources component, have you seen any reductionin turnover? And then secondly, I was just wondering if on the working capitalopportunity, is that opportunity in the tens of millions? Or is thatopportunity potentially over $100 million?

Peter L. Lynch

Okay, on the first one, people regarding turnover, I cantell you with the managers that we’ve brought on board, I’ve seen very littleturnover, so that’s a good thing. The most important thing I’ve seen with thenew managers is a better focus on the bottom line and the top line and theresults that I’m seeing is they are driving sales and un-leveraging the bottomline, which is really good. But my expectation would be with the changes we aremaking with the team, there will be less turnover going forward.

Regarding the second one, Bennett.

Bennett L. Nussbaum

I think over time, the number is more toward the upper endof what you just asked than the lower end.

Jim Lane - Tri-AssetManagement

Thank you very much.

Operator

(Operator Instructions) We’ll go next to James Adams with [Copia]Capital.

James Adams - CopiaCapital

Good morning. One follow-up question on the comment you justmade about working capital, you saying it’s toward the upper end of what thelast caller was suggesting, are you talking just about working capital or alsoabout some of those other liquidity --

Bennett L. Nussbaum

I’m talking about all the liquidity opportunities.

James Adams - CopiaCapital

Okay, and then just a question on the guidance for thisfiscal year. If you look at what you’ve done in Q1 and what you talked about inQ2, I mean, the lower end of your guidance kind of implies that Q3, Q4 would beflat with last year. Is that kind of -- you’re just viewing that as kind of avery base case scenario and expecting upside from there?

Bennett L. Nussbaum

Well, the thing you have to remember is first of all, in thefourth quarter of last year, we had a $20.6 million one-time income item fromthe actuary bringing down the long-term development costs of our workers’ compobligations. Net of that, our guidance all along has been that most of theincrease this year will come in the first half of the year.

James Adams - CopiaCapital

You were talking earlier about the remodels and I guess it’skind of obvious how you target the defensive remodels based upon competitoropenings, but the 80% of the remodels that are offensive this year, can youtalk about how you selected the sites that you want to target for those?

Peter L. Lynch

James, we go through a filter for this whole thing. We’retaking a look at the amount of capital a store needs. We put that together withwhat type of return we are going to get. We look upon clustering some of thestores so that we can get a G&A or a market in there with some intenseremodel opportunities going on.

There’s a number of different things we look at to put thattogether strategically to make sure we are doing the right stores at the righttime.

James Adams - CopiaCapital

Could you talk about -- are there a couple of markets thatare -- that you are focusing on more so this year which ones those are?

Peter L. Lynch

I don’t think I’ve given that out, but I just -- obviouslyJacksonville, we’ve done a lot here this current year with the remodels thathave been completed. But beyond that, I’m not going to jump in anymore. I don’tthink I want to let my competitors know what we’re doing.

James Adams - CopiaCapital

Okay. Thanks.

Operator

We’ll take a follow-up from Mark Husson with HSBC.

Mark Husson - HSBC

Just a quickie; I know that what you are trying to do isbalance your gross margin expenditure on promotions with comparable storesales. If you had your druthers and you didn’t have to talk to impertinentpeople like us every quarter, how many of the sales do you think you would justget away -- you’d just deliberately lose in order to get profitable sales? Forinstance, in this coming quarter, you are saying we expect EBITDA to besomewhat less because we are making all these investments and promotionsbecause we are trying to get off it but we are not off it yet. If you could getoff it, what would the sales loss be, do you think, and what would the EBITDAbe?

Peter L. Lynch

Mark, first of all, I don’t think you’re impertinent. Secondof all, as I said before, we are going to turn this dial to keep the rightbalance and I’ve never suggested that we jump into this thing and just turn itall off, because I think there is a proper balance between getting some of thepromotional items out there on for a little bit of unprofitable sales versuswhat the profitable ones are, so we’re not going to go off to one side. We’regoing to keep it balanced and we’re going to drive the right amount of salesfor the company going forward.

Mark Husson - HSBC

Thank you.

Peter L. Lynch

I think we have time for one last question. Or are we done?Operator?

Operator

It appears we have no further questions at this time. Iwould like to turn the call back over to Mr. Peter Lynch for any additional orclosing remarks.

Peter L. Lynch

In closing, I would just like to again thank all of you forbeing on the line this morning. I am very, very pleased with our results forthe first quarter and we are working very, very hard on quarter two and I’ll beout there in the stores making sure everything is going right. Thanks,everybody.

Operator

And once again, that does conclude today’s call. We doappreciate your participation. You may disconnect at this time.

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