Grocery store chain Winn Dixie (Nasdaq:WINN) seems to be gaining traction with its multi-year plan to upgrade its stores. In reporting 2012 fiscal first quarter results, Winn Dixie delivered a same store sales increase of 3.3% while overall net sales increased 3.1% to $1.6 billion compared to the year ago quarter. Sales increased thanks to consumers spending more at Winn-Dixie. Sales growth helped Winn Dixie report a loss of $24 million, significantly less than the $77 million loss in the year ago period.

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Turnaround in Progress
Winn-Dixie has been a work in progress for years. After emerging from bankruptcy several years ago, grocery veteran Peter Lynch came in as CEO and set the company on a path of eliminating weaker performing stores. In addition, he is transforming stores into more modern destinations with greater emphasis on quality, cleanliness and service. The efforts seem to be working as the new transformational stores are generating significantly higher sales, per square foot, than the older stores. The company's adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter was $7.4 million versus a loss in year ago period. Looking ahead, the company is expecting adjusted EBITDA of $120 million to $135 million in fiscal 2012. If the current turnaround continues to succeed and new stores generate stronger and stronger sales, Winn-Dixie may achieve profitability sooner than many think. (For more on EBITDA, see EBITDA: Challenging The Calculation.)

A Dirt Cheap Business
Winn-Dixie sales have sold off over the past month, and trade for about $6.50 a share or a market cap of about $360 million. With no debt and $168 million in cash, the enterprise value is close to $190 million. Based on the company's EBITDA projections, Winn-Dixie is trading at less than two times EV/EBITDA. Kroger (NYSE:KR), the nation's largest grocer, trades at a comparable multiple of nearly five times EV/EBITDA. The comparable multiple for other grocery chains, like Safeway (NYSE:SWY) and SuperValu (NYSE:SVU), is also between four to five times. Yet, all these stores have varying amounts of debt, with SuperValu topping the list with over $6 billion in debt against a market cap of $1.6 billion.

I would expect that over time, if Winn-Dixie continues to show improvement each and every quarter, its valuation disconnect with its peer group will slowly close with it getting a higher multiple. In the meantime, the company's solid balance sheet offers great comfort during the current economic environment. As long as management can continue to successfully engineer the company's transformation, and not mis allocate the company's capital, the business should clearly command a higher valuation. It's likely the market may want to see another quarter of results to affirm that operations are on track with management guidance. (For related reading, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.



Tickers in this Article: WINN, KR, SVU, SWY

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