Winn-Dixie Stores (WINN) operates 520 supermarkets, 70% in Florida and the rest in Alabama, Louisiana, Georgia and Mississippi. Thanks to poor management, run-down stores and fierce competition, the company, which had 1,000 stores at the time, filed for bankruptcy in early 2005. Having shed all of its debt and approximately half of its stores, Winn-Dixie emerged from bankruptcy early this year under the leadership of Peter Lynch, who for the previous three years had been the President and COO of Albertsons, where he’d been in charge of operations, merchandising and marketing for the company’s 2,500 stores and led a 200-store asset rationalization and $500 million expense reduction program. During bankruptcy, Winn-Dixie shed its worst stores and is now investing in the remaining ones (it plans to remodel 75 this fiscal year), with great results so far: same-store comps at newly remodeled supermarkets are in the mid-teens.
The investment situation today reminds us of K-Mart at the same stage post-bankruptcy: a business barely making money and dismissed as hopelessly competitively disadvantaged, but with a strong balance sheet, great opportunities for improvement (from a low base), strong management and, most importantly, a stock that we believe is deeply undervalued. Here’s one data point of note: on a price-to-sales basis, it’s almost exactly as cheap as K-Mart was – and that stock was nearly a 10-bagger.
Winn-Dixie’s market cap today is $1.3 billion and, net of slightly more than $200 million of cash, the enterprise value is $1.1 billion. With $7.2 billion in trailing 12-month sales, the enterprise value is a mere 15% of sales. This chart shows the price-to-sales ratio of Winn-Dixie compared to certain other retailers:
The primary reason for this valuation discrepancy is Winn-Dixie’s lower margins, but we see no reason why, over the next couple of years, they won’t migrate toward normal industry levels, which we believe would result in at least a doubling of the stock. An added bonus is that we think Winn-Dixie would be a nice acquisition for a company seeking to expand in the rapidly growing southeast region.