Tough Love at Winn-Dixie

Ailing supermarket chain Winn-Dixie's (NYSE: WIN) shares opened up 5% this morning on what looks like the first decent news in quite a while: the announced sale and closing of a total of 156 stores, plus distribution centers and a handful of manufacturing businesses.

Let me qualify that. It might be good news for shareholders, but it isn't likely to make any of the 10,000 at-risk workers feel so warm and fuzzy inside.

Still, drastic times call for drastic measures, and Winn-Dixie is still walking through the valley of the shadow of death. Last quarter, there was little good news, as a decline in revenues and a big slip in gross margins, plus growing selling, general, and administrative expenses, combined to help the company lose $80 million. Since last spring, shares have shed nearly half their value and are currently trading at close to $8 a stub.

So today's announced closings represent the beginning of a survival plan, but the future is still unclear. There was, after all, another small bit of Winn-Dixie news today: a little something called a third-quarter earnings report. At first glance, it's not any prettier than the previous quarter's.

Sales? Down 5.5% year over year. Gross margins? Down 1.2% year over year. Earnings? A big goose egg, while last year they were $0.36 per share.

On the other hand, we're talking about a firm that's only mostly dead. It makes sense to look for any inkling of life, and there are a few. Gross margins actually improved a bit when compared with the second quarter's abysmal showing. The company also managed an important reduction in interest payments.

The balance sheets show $81 million in cash and $300 million in debt, but also indicate improvements in handling of accounts receivable and inventories. As a result, the bleeding seems to have stopped. Sure, there's still the danger of competition from other grocers and universal retailer Wal-Mart (NYSE: WMT), but investors interested in a turnaround play should keep an eye on Winn-Dixie. It still trades just above book value, and it looks like management is making all the right moves.

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Fool contributor Seth Jayson likes to look at stocks that have been beaten down, but owns no stake in any firm mentioned above. View his Fool profile here.