Winn-Dixie swings to quarterly loss but touts turnaround progress; eyes new capital sources down the road

By Paul Deckelman

New York, Aug. 19 - Winn-Dixie Stores Inc. reported a swing into the red in its fiscal fourth quarter Friday - but the struggling Jacksonville, Fla.-based supermarket operator said that it had taken "significant steps" in order to implement the wide-ranging turnaround plan it introduced after seeing its earnings slide earlier in the year.

"We had another challenging quarter in a difficult year," the company's president and chief financial officer, Frank Lazaran, told analysts and investors on a morning conference call following the company's release of results for the quarter and for the full 2004 fiscal year, both ended June 30. However, he continued, "we are doing the right things. We have taken significant steps" to put the turnaround plan into action.

Among these has been the rationalization of Winn-Dixie's far-flung network of stores, primarily in the Southeastern U.S. and the Bahamas. Earlier in the year, the company announced plans to

to sell or close 156 of its 1,078 stores, withdrawing completely from the Midwest, Virginia and selected markets in North and South Carolina, Mississippi and Tennessee in order to focus on its core markets in the remainder of the Carolinas, Mississippi and Tennessee, its home turf of Florida, plus Alabama, Louisiana and Georgia, as well as the Bahamas.

Winn-Dixie identified 36 core designated market areas, or DMAs, which it defined as communities where the local Winn-Dixies collectively are either first, second or third in sales relative to their competitors, or where there might be future strategic opportunities to become a market leader. It is in the process of selling or closing 45 underperforming stores in these areas and to date has shuttered 19 of them, offering to sell them to non-food retailers so as not to help its competitors. It has also closed 13 of the 111 stores slated for closure in its non-core areas. It expects to have the full roster of stores closed by the end of this coming April.

Besides getting out from under unprofitable stores in undesirable markets, the company is also attempting to re-make itself, capitalizing on its long-time presence in many Southern communities to market itself, Lazaran said as "the neighborhood grocery store," competing on convenience, quality and price, in an effort to blunt the appeal of Wal-Mart Stores Inc., which has been aggressively expanding its network of "superstores", which sell groceries and just about everything else, into traditional Winn-Dixie markets.

That increased competition, in what is essentially a low-margin industry to begin with, caused Winn-Dixie to post a net loss of $22.7 million for the fiscal fourth quarter, or 16 cents share, including discontinued operations, versus year-earlier net earnings of $62.5 million, or 44 cents per share. For the full 2004 fiscal year, the company reported a net loss, including discontinued operations, of $100.4 million (71 cents per share) versus year-ago net earnings of $239.2 million ($1.70 per share).

Test in Miami/Fort Lauderdale

In the interest of becoming more competitive against both Wal-Mart and other rivals in its market areas, Winn-Dixie has designated a "lead market" - the Miami-Fort Lauderdale area - where it hopes to preview the Winn-Dixie of the future.

It is in the process of giving its 92 stores there an image makeover, with new lighting, interior and exterior paint jobs, outdoor signage and other physical improvements, as well as an effort to improve customer service, in such areas as the produce, bakery, seafood and deli operations, installing or upgrading self- checkout services, and stocking stores located in ethnic neighborhoods with products that appeal to the locally dominant group. Lazaran noted that Miami, with its diverse multicultural mix of different populations, is an ideal area in which to try out its initiatives in this area.

The "lead market" will be Winn-Dixie's laboratory, as it were, for testing its new product offerings and merchandising programs, along with its new training, recruiting and performance management initiatives. The company assumes that if its experimental methods work there, they can be rolled out in other communities as well - although the CEO said that anything that looked like it was working there would be quickly adapted for other markets as well. To date, Winn-Dixie has finished physically sprucing up 41 of its supermarkets in the Miami-Fort Lauderdale market, and has deployed the new management and customer-service initiatives in eight stores so far. It plans to add another 10 by the end of this month, with around 40 stores converted to the new look and new policies by Thanksgiving and all 92 having undergone the transformation by the end of March 2005.

Lazaran said that the company had gotten good customer feedback so far from shoppers in the stores in which the plan has been put into effect, although he cautioned that with only a handful of stores participating so far the plan is not yet having much impact on the bottom line.

All of this, of course, is costing the company a considerable amount of money - money which Winn-Dixie says it has for the moment, although it will need more if it hopes to replicate its initiatives outside the "lead market" somewhere down the road.

Current funding adequate

But for now, "we continue to believe that the current cash on hand an available borrowings under our revolving credit facility, together with anticipated cash flow from operations, cash increased as a result of improvements in working capital and asset sales from the execution of the asset rationalization plan will be sufficient to fund the company's current operating and capital needs," declared chief financial officer Bennet Nussbaum.

On June 30, Winn-Dixie announced an agreement with its lenders to double the size of its existing senior secured credit revolver from $300 million to $600 million. The amended and restated senior secured credit facilities consist of a $400 million three-year revolver and a $200 million three-year standby letter of credit facility. Wachovia Capital Markets LLC was the sole lead arranger for the $600 million senior credit facilities.

As of June 30, 2004, Winn-Dixie's total liquidity was $448.5 million - $56.8 million in cash and cash equivalents and $391.7 million of net borrowing availability under its credit revolver.

Will need funding for future plans

While Winn-Dixie has sufficient cash and borrowing power to meet its needs for the moment, including the costs of its Miami makeover, Nussbaum acknowledged on the conference call that as the company had said during its last previous conference call, when it released its third-quarter results, "execution of some strategic initiatives will require additional funding. Therefore, before we can implement the more capital-intensive aspects of our strategic initiatives outside of our 'lead market' area, or increase our remodeling activity, which we believe we need to do over time, we will either need to produce improved operating results, or secure additional sources of capital.

But for the near-term, the CFO said, "we believe we have the financial flexibility to run our business and fund the relevant aspects of our strategic initiatives."

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