Winn-Dixie Hurt by Promotions

Admitting that promotions to reel in value-oriented shoppers went too far, Winn-Dixie Stores said margins and earnings fell well below expectations during the fourth quarter and fiscal year that ended June 25. Shares slid by 20% after Winn-Dixie announced the preliminary financial results and adjusted its earnings outlook, saying that EBITDA would fall below previous projections

JACKSONVILLE, Fla. — Admitting that promotions to reel in value-oriented shoppers “went too far,” Winn-Dixie Stores said margins and earnings fell well below expectations during the fourth quarter and fiscal year that ended June 25.

Shares slid by 20% after Winn-Dixie announced the preliminary financial results and adjusted its earnings outlook, saying that EBITDA would fall below previous projections and the retailer would post a loss for the year. The figures are subject to an internal review and will be updated in a 10-K filing later this month.

“In hindsight, it's clear we went too far. We simply invested too much in promotion activities,” Peter Lynch, chief executive officer, said in a conference call. “Although we grew sales during the fourth quarter, this increase in promotional activity caused us to fall below the lower end of our adjusted EBITDA guidance for the year.”

Lynch said restoring a balance between sales and margins was a “top priority,” and that Winn-Dixie had already moderated promotional spending in the first quarter. But he admitted that soft sales in April prompted the retailer to “push the needle,” layering promotions such as “10 for $10,” “Stretch Your Check” and $5-off coupons onto other promotions.

These offers resonated with customers who had turned sharply value-conscious, Lynch explained.

“Consumers got a good deal, but it hurt us at the same time,” he said. “By the time I recognized we over-promoted — it's three or four weeks before you can stop these things — the damage had been done.”

Specifically, Winn-Dixie said it expected EBITDA of $9 million for the quarter, compared with $29.1 million in the same period a year ago, and a loss of $5 million vs. a profit of $20.6 million a year ago. Yearly EBITDA of $101 million fell below the company's previously stated expectations of $105 million to $125 million. Gross margin as a percentage of sales for the quarter decreased by 1% to 26.9%.

This accompanied quarterly sales of $1.7 billion and an identical-store sales increase of 1.5%. Sales were boosted by promotions and inflation, while negatively affected by a shift to generic drugs and the timing of the Easter holiday, Winn-Dixie said.

Lynch said Winn-Dixie would rely on sales improvements at renovated stores and improvements in private-label penetration to drive better sales and profits in fiscal 2009. About 91 Winn-Dixie stores have been renovated since the turnaround program began late in fiscal 2007, and 75 remodels are scheduled this fiscal year.

A revamped private-label program had rolled out 1,500 SKUs with new packaging by fiscal year-end, Lynch said, and corporate-brand penetration increased to 20.6% of sales, an annual increase of 1.5%. The company plans to add another 1,000 new SKUs to the program this year.

The recently announced sale of 49 Florida Albertsons stores to Publix Super Markets could help Winn-Dixie, Lynch added.

“They've taken a competitor out of the marketplace, so there's going to be one less ad out there. And quite frankly, it was the most aggressive one,” Lynch said. “Publix just helped rationalize the market, and I think that's only going to help us — and it didn't cost me a dime.”