Is Winn-Dixie A Long-Term Winner?

By Greg Sushinsky | February 22, 2010 AAA

Grocer chain Winn-Dixie Stores (Nasdaq: WINN) posted slightly lower sales and earnings, though these were largely ahead of what the street projected. While its stock has languished until recently, the grocer chain continues making headway on its turnaround path.

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Winn-Dixie's Low-Cost Ways
Since Winn-Dixie emerged from bankruptcy in 2006, it has been a tightly run operation. The company features zero long-term debt and has cautiously been remodeling some of its older store. Its second-quarter 2010 earnings report showed revenues of $2.2 billion, off 3.3% from last year. Net income was $2.1 million, or four 4 cents a share, compared to $16.1 million and 30 cents from last year. Last year's quarterly earnings included one-time gains of net $13.8 million in income or 25 cents per share. Comparing the earnings without the special items, they are nearly flat.

Headwinds in the Grocery Aisles
The economy has been tough on the grocers, as most have had to fight through challenges, namely getting the newly frugal consumer to loosen up and spend a bit more. The supermarket landscape should look similar this year. Grocers are addressing this in several ways. Kroger (NYSE: KR) is among those looking to trim down the number of brands they carry. Kroger also has a new deal with Shell (NYSE: RDS.A) to sell gas. Discount gas is still a highly attractive lure for consumers.

Meanwhile, at A & P (NYSE: GAP) they've hired a new CEO, Ron Marshall, a turnaround specialist who saw the futility in the Borders (NYSE: BGP) job and came over to the grocery aisle to the hard-hit supermarket. This move garnered A & P an analyst upgrade and some positive comments.

Will the Difficulties Persist?
Many in the investment community are low rating supermarkets, even such stalwarts as Safeway (NYSE: SWY). The persistently bad economy along with the tough competitive environment has held the group back. Yet there are signs of emergence into better times. Safeway's earnings have been edging up after its recessionary dip. Some other grocers are staving off further declines.

Winn-Dixie's Direction
A look deeper into the numbers shows that comps, identical store sales, were down 2.9% for Winn-Dixie. In newly remodeled stores, sales were up 4.1%. Gross margins were roughly even, up slightly to 28.2% from 28.1%, and costs were down. Adjusted EBITDA was $30.5 million, down from $35.5 million last year's quarter, though last year's number included a one-time benefit of $1.7 million. (Learn about using EBITDA in Challenging the EBITDA Calculation.)

There are still challenges ahead for the grocer this year, as the consumer is still cautious and competition in the industry is still formidable. Winn-Dixie's geographical region, the southeast, hasn't fully rebounded economically. The grocer also has to continue to work on upgrading its stores and thus its image.

Bottom Line
The company's careful remodeling program is worth noting as successful so far. This is an area where Winn-Dixie can achieve an upgrade in image and customer experience without over-committing financial resources. Gains here can go a long way toward solidly establishing the company as a low-cost grocer attractive to consumers. For investors, the stock is beginning to move, but still trades well under book value. With no long-term debt and management executing operations well in the new, difficult supermarket retailing climate, Winn-Dixie has advanced beyond the turnaround stage and has a good chance to be a long-term winner.

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