Winn-Dixie: Promotional Efforts Torpedo Fourth Quarter Results

Winn-Dixie (WINN) CEO Peter Lynch admitted that the promotional programs implemented to attract and retain more customers backfired and Wall Street whole heartedly agreed. The shares took a 20% drubbing and closed at $12.79, a new historical low after fourth quarter results failed to meet expectations. The 'bloodletting' was another overreaction, as sellers all seemed to hit the exits at the same time, creating a nice opportunity for those buyers with a 'contrarian mentality'.

Fourth quarter margin erosion: The aggressive promotions such as "stretch your check" and "ten items for $10" negatively impacted gross margins by 100 basis points from 27.9% to 26.9%. Management has since curtailed the discounting significantly, and Lynch is pleased with the way operations are proceeding during the first four weeks of the first quarter. "The promotions ended up being good for our customers, but not so good for us, hopefully we picked up some new business in the process," stressed Lynch.

Fiscal 2007 versus fiscal 2008: WINN is still moving in the right direction despite the setback. Its 2008 EBITDA grew 57% from $64 million to $101 million. Gross margin increased 30 basis points to 27.20%. Same Store Sales was a problem, as this key metric inched up only .9%. If you have recently purchased milk, eggs or bread, you might have noticed these items have jumped considerably further than the CPI just within the last 6 months. It is surprising that WINN appears to be getting no help from the impact of inflation. This leads me to believe they are experiencing unit sale decreases.

2009 guidance: Management has specified an EBITDA guidance range of $110 to $125 million. That equates to an improvement of 10% to 25% over 2008 results.

Liquidity: The company improved its liquidity by $62 million from $593 million to $655 million (consisting of $201 million cash and $454 million borrowing availability). The liquidity improvement is notable since the company was able to achieve this despite investing $230 million back into the business.

The numbers: WINN's .12 price to sales ratio is the lowest in its sector, and its shares are selling at a 15% discount to book, again the lowest within the category. The company has over $200 million in cash and no debt. If you divide its market cap by its 520 stores, you end up with an average cost per store figure of $1.2 million (below the cost of opening a new location) which is $800,000 less per store than its nearest competitor.

Store remodeling: WINN has completed remodeling efforts on 90 stores and plans to complete an additional 75 remodels in Fiscal 2009. Remodeled stores have averaged an 11.5% sales lift. The company should focus more on improving profitability than remodeling at this juncture. It would be prudent for WINN to slow its remodeling campaign in order to conserve cash for more pressing issues, such as boosting the price of the stock by implementing a cash dividend.

Private label branding: The company has 1,500 items under its own label, and plans to double that figure within the next two years. These private label brands are more profitable than national brands and their penetration rate has increased 150 basis points to 20.6%.

Disconnect of the share price: WINN is on schedule to just about double EBITDA in 2009 from 2007 levels, yet the share price is at an all-time low, corresponding to its price just after the company emerged from bankruptcy. WINN is a much stronger enterprise than it was two years ago, yet it is perplexing that Wall Street has failed to tack on even a single penny of appreciation to its share price, especially after two years of steady improvement.

Shareholders have been battered and bruised: Shareholders need relief and they need it fast. The Board of Directors should evaluate the feasibility of utilizing one half of the company's cash flow to immediately return to shareholders through the repurchase of shares or the payment of cash dividends. The Board should even go as far as to evaluate the possible sale of the entire company.

The bottom line: I liked the shares at $16, and love them at $12.75. I know it's against conventional wisdom to be buying on the way down, but it's hard to pass up a screaming bargain. It's not like this company is chock full of debt or is on the brink of Chapter 11 - these guys are food purveyors and we all must eat. This is a defensive play. A poor economy is beneficial to this sector, as inflation theoretically aids sales while consumers eat out less, requiring them to buy more groceries. It is safe to say that fourth quarter results were probably just a blip on the radar screen, and WINN will quickly get back on track, handsomely rewarding patient investors.

Disclosure: Long

Comments

[User 237530:]

HARD TO PASS UP A SCREAMING BARGAIN : #1. I DON'T THINK THE LAW WOULD LET WINN GO BACK INTO CHAPTER 11 MAY BE CHAPTER 7 I HAD THE OLD W/D STOCK AND LOOK HOW THEY HANDSOMELY REWARDED US PATIENT INVESTOR'S BACK THEN. ALSO MR. LYNCH SOLD $771000.00 OF HIS STOCK FROM 06-07-08 - 07-07-08 YOU MIGHT WANT TO THINK A LITTLE MORE

2008 Aug 03 07:10 PM

[Mark Krieger:]

The Ceo sold only once in two years, and the amount he sold was chicken feed or pocket change for a CEO. The company is a safe investment. It went BK because of too much debt, and today it is free of debt. That was then and now is now. You are comparing apples with oranges. This is a screaming buy, especially since its vulnerable to a hostile takeover at these depressed levels.

2008 Aug 04 08:38 AM

[Jimbo:]

My wife and I live in the middle of Winn Dixie country. We have been looking for alternatives to Publix Grocery's high markups. The Winn Dixie store near us has really improved. Much cleaner and well stocked. We are trading there more.

2008 Aug 04 11:34 AM

[truthinvesting:]

Nice article but why not buy MO KFT PM etc which pay great dividendsand have lower pes

2008 Aug 04 02:35 PM

[seekingalph...:]

It would be nice if insider ownership were higher. Do they have any significant restricted stock or option incentives?

2008 Aug 04 04:16 PM