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Winn-Dixie in a fight for its survival

The chain is losing money, and its stock and credit rating are slipping. Executives say solutions are on the way.

By KRIS HUNDLEY
Published January 31, 2004

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Winn-Dixie, battered in the brutal supermarket price wars, reported a shopping basket full of bad news Friday.

The chain based in Jacksonville announced an unexpected quarterly loss, elimination of its dividend, a drop in its debt rating and still-vague plans to close some of its 1,078 stores in a dozen states and the Bahamas.

Despite pledges by the company to retool its image, investors responded by driving down the grocer's shares to a 15-year low. Its stock closed Friday at $6.56 share, down $2.53, or nearly 28 percent.

"Winn-Dixie is in a fight for its life," said Robert Campagnino, analyst with Prudential Financial, who lowered his price target on the stock to $1 from $8.

Among the steps Winn-Dixie listed to turn things around: closing stores in weaker markets; repositioning the brand now known mainly for its beef; and cutting $100-million in annual expenses.

Like Tampa's Kash n' Karry, which also recently announced store closings and image upgrades, Winn-Dixie has struggled to find a winning formula against market leaders like Publix and the growing grocery juggernaut of Wal-Mart's Supercenters.

Wal-Mart has edged out Winn-Dixie for the No. 3 spot among supermarkets in the Tampa Bay area.

Saying Winn-Dixie's prices are competitive with Wal-Mart's, analyst Campagnino asked, "Just how inexpensive does the product have to be in order for the traffic to return to Winn-Dixie? Quite frankly, we don't know the answer."

During a conference call with analysts, Frank Lazaran, Winn-Dixie's president and chief executive since June, said, "We are obviously disappointed in this quarter's results and we recognize that we cannot continue down this path."

Winn-Dixie lost $79.5-million or 57 cents a share on revenues of $3.6-billion for the quarter ended Jan. 7. That compares to earnings of $91.4-million or 65 cents a share on sales of $3.8-billion in the same quarter a year ago.

The company had been expected by analysts to post a profit of 9 cents a share for the quarter.

Overall, sales at Winn-Dixie stores open at least a year were down 6.8 percent for the quarter.

"We have to fundamentally change our culture," said Lazaran, who joined Winn-Dixie in April 2002 as chief operating officer, "to adapt a "sell' mentality, based on the needs and desires of our customers."

Lazaran said Winn-Dixie will be closing stores in non-core markets. He declined to indicate where those markets might be or how many stores would be closed. More details on store closings will be provided to Winn-Dixie's board by April, Lazaran said.

But Lazaran noted, "We have nice market share in Florida." Analysts agreed closings are most likely to come outside of the chain's home state.

Chuck Gilmer, editor of the Shelby Report of the Southeast, which tracks grocers' market share, said Florida is Winn-Dixie's top market, holding second-place positions behind Publix in Miami and the company's hometown of Jacksonville.

Weaker markets, Gilmer said, include Norfolk, Va., where Winn-Dixie is No. 8; Charlotte, N.C., where it is No. 5; and Atlanta and Louisville, where it is No. 4.

Mark Husson, analyst with Merrill Lynch, thinks Winn-Dixie will close 100 or more stores, most likely in the northern part of its geographic range.

"Winn-Dixie has been too often the No. 3 or 4 player with a poorly defined niche," he said.

To tackle that fuzzy image, Lazaran said the chain has hired VML, a brand marketing firm, to make Winn-Dixie's offerings appear distinctive. In particular, the company has found that a restructuring effort in 2000, which cut its deli and bakery offerings, resulted in lost sales and dissatisfied customers.

"We have a reputation for high-quality meats," Lazaran said. "Now we're refocusing on produce and deli-bakery. We took down those departments too deep. Now we're putting those products back in."

Lazaran said the chain will also complete "image make-overs" of nearly 700 stores - improving lighting, as well as interior and exterior decor - over the next year. About 100 stores already have been renovated. None of the remodeling has taken place in the Tampa Bay area.

Lazaran assured analysts that Winn-Dixie has adequate resources to fund its current operations, despite its downgrade Friday by Standard & Poor's Ratings Services. The rating agency reduced the chain's rating further into junk range status, to "B" from "BB" and put the company on "credit watch with negative implications."

To cut costs, Winn-Dixie said it will indefinitely suspend future quarterly dividends, which had amounted to $28-million annually and were a big part of its appeal to shareholders.

Until 1993, the company held the New York Stock Exchange record of issuing consecutive monthly dividends for 50 years. During an earlier restructuring in 2001 the company went from a monthly to quarterly dividend.

Husson, the Merrill Lynch analyst, said he was encouraged by Winn-Dixie's turnaround plan, despite its shocking losses in the most recent quarter. And he's not yet ready to sound the death knell for a chain that has been around since 1925.

* * *

Arguing that many people prefer an alternative to Wal-Mart for groceries, he said, "I think Winn-Dixie has a profitable and defensible core. Many people want convenience, service and a broader perishable offering than Wal-Mart provides. It's just a shame Winn-Dixie didn't do this three years ago."

Erika Milligan is a local Winn-Dixie shareholder who cringed when she heard how far the company's stock had dropped from her purchase price of $12 several years ago. But the Pasco County retiree said she has no intention of selling at a loss.

"There's going to be a lot of red ink for a couple of quarters, then it's likely to go back up," she said. "At least I'm hoping."

Milligan fits the profile of a shopper who prefers traditional supermarkets to mass merchandisers like Wal-Mart.

"I shop at Winn-Dixie because they sometimes have a pretty good price, it's close and I think Wal-Mart is getting too darned big," she said. "But I still do the majority of my shopping at Publix."

- Times staff writer Mark Albright contributed to this report. Kris Hundley can be reached at hundley@sptimes.com or 727 892-2996.

[Last modified January 31, 2004, 01:00:44]

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