WINN-DIXIE FACES TOUGH CLIMB OUT OF BANKRUPTCY

JACKSONVILLE, Fla. -- Winn-Dixie, the iconic Southern retailer here whose long, slow decline culminated in a Chapter 11 bankruptcy filing last week, will face a difficult climb back, industry observers predicted.Winn-Dixie, a $10 billion retailer that operates 920 stores in the South and the Bahamas, said bankruptcy was forced by sliding credit ratings, pressure from vendors, and losses due to poor

JACKSONVILLE, Fla. -- Winn-Dixie, the iconic Southern retailer here whose long, slow decline culminated in a Chapter 11 bankruptcy filing last week, will face a difficult climb back, industry observers predicted.

Winn-Dixie, a $10 billion retailer that operates 920 stores in the South and the Bahamas, said bankruptcy was forced by sliding credit ratings, pressure from vendors, and losses due to poor sales and closed stores. It intends to exit lease obligations for dark stores, implement further facility closures, and work on initiatives to improve sales during the reorganization period. However, observers contacted by SN were skeptical that even a slimmed-down Winn-Dixie could compete over the long haul, noting that survival will require making gains at the expense of the same competitors that have profited most from its struggles. Its survival also will require the reversal of trends that reached crisis proportions this month only after years of spiraling downward.

"For a retailer with low sales productivity, turnarounds are a very, very difficult thing because it means you have to take market share from somebody," Andrew Wolf, an analyst for BB&T Capital Markets, Richmond, Va., told SN. "Even when Winn-Dixie emerges, they will still face arguably the toughest competitors in the country in Publix and Wal-Mart on an ongoing basis in their core Florida market."

Wolf speculated that Winn-Dixie's assets may ultimately provide their best value in combination with another retailer -- Albertsons, for example -- as a means to fight for lost market share in places like Florida, where Publix, Lakeland, Fla., and Wal-Mart Stores, Bentonville, Ark., have built strong positions. Others noted that independent retailers stand a good chance of benefitting from Winn-Dixie's filing, as locations are set free throughout the South.

For some, the filing came as a relief. The promise of starting again with a stronger group of stores with a better focus on sales -- initiatives that Peter Lynch, Winn-Dixie's chief executive officer, has pledged to undertake -- pleased Doron Valero, president and chief operating officer of Equity One, a North Miami Beach-based real-estate company that owns 16 shopping centers anchored by Winn-Dixie.

"I think it's long overdue," Valero told SN. "I wish they'd done it earlier because they've bled so much in the last year and a half.

"In their core market of Florida, there's room for another successful grocery chain because there's only one now -- and that's Publix," Valero continued. "There used to be two."

OPPORTUNITY TO IMPROVE

Virtually all observers agreed that Winn-Dixie was in need of a better brand message, a more compelling offering, and a stronger core of stores. Inasmuch as the bankruptcy filing offers the company an opportunity to address those issues, the move is a positive, said Neil Stern, partner, McMillan/Doolittle, Chicago.

"This doesn't have to be the end for Winn-Dixie," Stern said. "Hopefully, what this [bankruptcy] does is buy some time for Peter Lynch and his team to figure out what Winn-Dixie stands for in the future."

Stern said he expects Winn-Dixie's reorganization plan could result in 100 or more additional stores closing and perhaps several market areas.

In a research note, John Heinbockel, analyst, Goldman Sachs, New York, said he remained "skeptical of the company's ultimate turnaround potential," citing an overstored Southeast market, and a lack of sales momentum and store differentiation.

Should Winn-Dixie close additional stores or exit market areas, independent operators could benefit, said David J. Livingston, a consultant based in Pewaukee, Wis. The company rejected leases on 148 dark stores and two dark warehouses last week.

"A lot of independents down South are saying, 'This is my chance to get that Winn-Dixie down the street,' and expand or move to a better location," he said. "There are a lot of small towns in the Southeast where Winn-Dixie is the only store in town."

POSSIBLE BIDDERS

Other sources said it was possible that bondholders or other groups -- even the Davis family, which co-founded the chain 80 years ago and held 36.5% of its stock -- could bid to take the company out of bankruptcy. One analyst who asked not to be identified told SN that any strategy of bondholders to purchase the company would be "a long way off" and would depend, in part, on the success of the reorganization plan, which will begin to form this week when a creditors' committee is assembled. Q Investments, a Fort Worth, Texas-based hedge fund associated with the group that last year purchased the Texas-based Minyard's chain, said it was Winn-Dixie's largest single noteholder, holding approximately one-third of the company's $300 million in notes.

Winn-Dixie -- No. 16 in SN's Top 75 rankings, with about $10.1 billion in annual sales -- listed assets of $2.2 billion and liabilities of $1.8 billion at the end of its most recent fiscal quarter. "The company has plenty of value to carve up. It's very organizable," Peter Chapman, Bankruptcy Creditors Services, Fairless Hills, Pa., said. "It takes a long while to chisel away that kind of value."

DDI Inc., an investment company owned by the Davis family, said in a statement last week that the bankruptcy marked "a difficult day in Winn-Dixie's history," but acknowledged the filing "provides the opportunity for a new beginning at the company." The drop in Winn-Dixie stock that accompanied the company's recent struggles -- it was delisted last week by the New York Stock Exchange, where it had traded since 1952, and resumed trading for less than a dollar on the "pink sheets" -- has cost the Davis family millions in net worth, observers noted.

"It's a real tragedy because the Davis family were not only one of the finest families in supermarket business, but in America in terms of charitable donations," said Burt P. Flickinger III, managing partner of Strategic Resource Group, New York.

EASY PREY FOR WAL-MART

Although the poor sales and lowered credit ratings announced earlier this month triggered the crisis at Winn-Dixie, the chain's problems date back for years, observers told SN. Winn-Dixie, they said, has generally proven slow to react to changes in the industry, and is prone to making poor strategic and hiring decisions. Its weakness and price positioning made it easy prey for Wal-Mart, which over the last decade saturated Winn-Dixie's core Southeast markets with its supercenters.

"You're looking at the culmination of activities taken place over a couple decades. This isn't just something that happened in the last three weeks, six months or six years," said Stern. "This is a company that failed to respond to food-drug combination stores. They failed to respond to consumers demanding fresher and better products, and they let their produce and delis lag the market. They were slow to build larger stores that had more comprehensive selections, and slow to get lean and efficient, and support a low-cost structure.

"Wal-Mart may have been the straw that broke the camel's back, but this was coming for a long, long time," he added.

Personnel has also been an issue at Winn-Dixie, Flickinger said, noting that both CEOs who proceeded Lynch -- Frank Lazaran, who served from June 2003 until December; and Al Rowland, who began in 1999 and proceeded Lazaran -- had little experience with turnarounds. He said Winn-Dixie made a costly mistake when it allowed Sam Walton, the late Wal-Mart founder, to serve on its board of directors in the 1980s. According to Flickinger, Wal-Mart learned much about the grocery industry through that association and applied the knowledge in developing the supercenter vehicles that would eventually impact Winn-Dixie.

"The challenge at the company now is to stop the losses," said Chapman. "They've got to get the chain contracted to a point where it can make money again."

Largest Creditors

JACKSONVILLE, Fla. -- A list of Winn-Dixie's top 50 unsecured creditors included as part of its Chapter 11 proceedings details some 46 companies owed more than $1 million each and more than $96.4 million overall -- the vast majority of that to grocery vendors. Combined with its largest institutional creditors -- led by the $300 million in interest-bearing notes administered by Wilmington Trust -- Winn-Dixie filed for bankruptcy last week owing more than $482 million to various unsecured lenders overall.

Following is a list of the 10 largest unsecured creditors as reported by Winn-Dixie:

Name: Amount of Claim (millions)

Kraft, Chicago: $15.1

Pepsico & Subsidiaries, Dallas: $14.6

Procter & Gamble Distributing, Atlanta: $6.1

Nestle, Atlanta: $4.3

General Mills, Atlanta: $3.7

Unilever, Clinton, Conn.: $3.0

Florida Coca-Cola, Orlando, Fla.: $3.0

ConAgra Grocery Products, Atlanta: $2.8

Kimberly-Clark, Dallas: $2.4

McKee Foods, Collegedale, Tenn.: $2.1