Winn-Dixie Boosts Q2 Margins

Winn-Dixie Stores posted a sharp increase in profitability in its fiscal second quarter last week after the company said it adjusted its promotional activity to help preserve margins. The company moved its reporting timetable up five days to share its positive financial results for the quarter, which ended Jan. 7 a move analysts said was designed to reassure Wall Street that

JACKSONVILLE, Fla. — Winn-Dixie Stores here posted a sharp increase in profitability in its fiscal second quarter last week after the company said it adjusted its promotional activity to help preserve margins.

The company moved its reporting timetable up five days to share its positive financial results for the quarter, which ended Jan. 7 — a move analysts said was designed to reassure Wall Street that business trends in the industry remain stable.

The chain reported net income of $16.1 million — a jump of 295.5% — for the 16-week quarter and $13.8 million — up 321.6% — for the 28-week year-to-date period. Sales rose 0.1% to $2.25 billion for the quarter, and 1.5% to $3.9 billion for the half.

Identical-store sales for the quarter increased 0.2%, driven by a 2.8% increase in basket size, which was offset by a 2.5% decrease in transaction count. IDs were up 1.4% for the year-to-date period.

Karen Short, an analyst with Friedman, Billings, Ramsey & Co., New York, said the results are encouraging for the retailer, which is still seeking to reestablish itself after emerging from bankruptcy two years ago.

“While Winn-Dixie is not out of the woods, its second-quarter results reflect the fact the company is managing extremely well in a tough environment,” she wrote in a research note. “However, the third quarter may be a more meaningful test of top-line results because the company will have more remodeled stores in the comp base and the promotional cadence should be more comparable year-over-year than it was in the second quarter.”

In a conference call with analysts last week, Peter Lynch, chairman, president and chief executive officer, said the earnings increase resulted in part from a decision to boost gross margins, which rose 140 basis points to 28.1% in the quarter and 100 basis points to 28% in the half.

“In the past we experienced lower gross margins during the holidays,” Lynch pointed out, “but we've worked hard to reposition our holiday promotional activity to deliver margins more consistent with the rest of the fiscal year.

“Last year we increased gross margin in the second quarter by approximately 100 basis points, and this year we built on that improvement and successfully eliminated sequential declines through a combination of product sales mix; less overall investment and promotional activity; and additional focus on corporate brands.”

In terms of remodeling activity, Lynch said Winn-Dixie has completed the first phase of its program, which involved upgrading stores across most of the markets in which it operates. Phase 2 will involve a market-by-market strategy, he said, “which will help us target our advertising efforts and leverage our brand more effectively.”

He declined to pinpoint which markets would be targeted first.

To date, Winn-Dixie has remodeled 112 stores, or approximately 20% of it store base, Lynch said. It plans to remodel 17 in the third quarter and 41 in the fourth for a total of 170 by the end of its fiscal year in late June, representing about one-third of its base, he added.

During the first half, the chain's 54 offensive remodels had a weighted average sales gain of 9.6% — “slightly below our 10% annual target,” Lynch noted.

Q2 RESULTS

Qtr Ended 1/7/09 1//08
Sales $2.25B $2.24B
Change +0.1
Comp-store +0.2%
Net Income $16.1M $4.1M
Change +295.5%
Inc/Share 30 cents 8 cents
28 Weeks 2009 2008
Sales $3.9B $3.87B
Change +1.5%
Comp-store +1.4%
Net Income $13.8M $3.3M
Change +321.6%
Inc/Share 25 cents 6 cents