Winn-Dixie Stores Remains Cheaply Valued

Winn Dixie (WINN) emerged from Chapter 11 in November of 2006. The new company consists of 520 Grocery Stores in the Southeastern US with locations in Florida, Alabama, Louisiana and Mississippi. The CEO is Peter Lynch--kind of ironic that he shares the same name as the Fidelity Magellan guru.

WINN is cheap. Its shares nearly qualify for a "half-price sale" when compared with last June's high of $31.45. The stock, currently selling near the $16 vicinity, is close to its book value of $15.46. Its balance sheet is striking with over $178 million in cash and no debt. The grocer has an open credit line of $465 million and coupled with its strong cash position, a notable liquidity situation of $643 million is created.

It has embarked on a store remodeling program that has already yielded positive results. The company has completed 54 store remodels and those completed locations have shown a 12% weighted average sales lift. The company intends to conclude an additional 200 store remodels by the end of fiscal 2010.

The company recently released 3rd quarter results that exceeded analyst expectations. EBITDA increased 11% from $46 million to $51 million on a 2.3% rise in revenues to $1.7 billion based on year over year comparisons. WINN's Gross margin increased 10 basis points to 28% versus 27.9%. Selling, General and Administrative costs increased $12.7 million, or 2.8%, from $446 million to $458.7 million and ended up playing a bit of a "spoiler" role. If WINN was just able to keep those SG&A costs in check, they would have seen almost a four-fold EBITDA increase of 39% versus their actual EBIDTA improvement of 11% (their EBITDA for third quarter 2008 would of increased an additional 25% from $51.2 million to $63.9 million). SG&A costs were higher due to: A) increased share-based compensation B) higher depreciation rates C) greater utility costs.

The top three shareholders control nearly 1/3 of the company with Fidelity holding a 15% stake, Advisory Research retaining 11% and Schultze Asset Management rounding out the third largest ownership position with 6%. Analysts are mildly bullish with both Friedman Billings and Lehman Brothers providing positive ratings and one year price targets of $19. There are also approximately 5 million shares sold short (10% of the outstanding shares) and any type of good news could spark a short covering rally.

Looking ahead: The company could initiate a small cash dividend in the future or authorize a Stock Buyback plan - it certainly has the cash to do so. It is also feasible that they become vulnerable as a takeover target as their Southeast presence could pose a valuable grab for a national chain such as Kroger (KR), SuperValu (SVU) or Safeway (SFY) looking to expand their market penetration.

Bargain-hunters may want to take a second look, given that WINN's share price is virtually unchanged from its price back when the company initially emerged from Chapter 11. Since then, WINN has put together seven consecutive quarters of positive improvements, yet Wall Street has given absolutely no additional value to the shares for these accomplishments. I think Wall Street is wrong, as it often is, and the shares present substantial opportunity for a big win.

Disclosure: Long–associated ticker symbols owned by author include KR, SVU and SWY.

Comments

[aswo1]

They compete head to head against Walmart in most of their markets. The WINN stock price tells me investors recognize that is a losing proposition.

[Rohan]

Aswo makes an excellent point, replete with logic, numbers, and cold hard facts.

Wait, I mean the exact opposite of that.

WMT was supposed to be the end of grocers several years ago. Last I checked, KR and SWY are doing just fine (the former's stock has roughly doubled in the past three years, while the latter's up 50%). Revenues continue to grow and earnings have magically been delivered as well.

WINN is valued at a ridiculously low multiple of sales (0.1x) compared to its peers at about 4x that, and its EBITDA margins of around 1% are about a fifth those it earned ON ITS CURRENT STORE BASE just a few years ago. It's still comping positive same store sales numbers year over year, exceeding its own goals on almost every front (EBITDA, remodel performance, penetration of private label, etc.), though it does need to get its transaction counts into growth territory. Competition is no idle threat, to be sure - Publix too is formidable - but anyone who still believes the grocery business is a commodity one rather than a convenience one ought to do more research. WINN's stores are decently located, the management team appears fully competent, and there's no reason the company can't get back to decent operating metrics in a few years time. If so, and that seems at least a decent proposition given performance of late, these shares will be dramatically higher.

Mark is right, WINN is cheap.

[The Real Expert]

You fail to realize that the traditional grocery store business model is broken. Even the strongest chain, Krogers, is struggling. I have NO DOUBT WHATSOEVER Winn Dixie won't be around in a few years. They will either go back into bankruptcy or be bought on the cheap by a competitor.

Only a fool would make a case for Winn Dixie. If you want a true value proposition you need to make sure the company is growing revenues per store rather than losing them.

[Rohan]

"If you want a true value proposition you need to make sure the company is growing revenues per store rather than losing them. "

Did you even read the article? Here's one data point Mark provided for you, if you actually take the time to scroll up the page:
"The company has completed 54 store remodels and those completed locations have shown a 12% weighted average sales lift. "

Same store sales ARE increasing year over year. It's not exactly buried information, bud. Let me make it easy for you, at the end of the first full paragraph of their most recent earnings release:

Gross margin was 28.0%, an increase of approximately 10 basis points compared to the year ago period, and identical store sales increased 2.2%.

I guess I'd be intrigued by your argument if you actually had any facts, but you're clearly dead wrong on the one numbers-based assertion you bothered to make.

[The Real Expert]

Rohan, experts don't need to read pumps on crap stocks. The company has no real long-term future.