Since emerging from bankruptcy in November 2006, Winn-Dixie Stores (Nasdaq: WINN) has been outperforming Wall Street expectations by double-digit percentages. After the markets closed on Monday, the company reported its third-quarter fiscal year 2008 earnings. Wall Street analysts expecting earnings per share (EPS) of $0.24 were once again proven wrong as the company raked in $0.28 per share, 17% above expectations.

Improving gross margin
Winn-Dixie is in the midst of a significant turnaround campaign aimed at increasing profitability. In the second quarter of its fiscal year 2008, Winn-Dixie reported a gross margin of 26.7%, 100 basis points above its 25.7% gross margin reported in the second quarter of 2007, proof that the strategy seems to be working. Gross margin improved yet again during the third quarter, increasing 130 basis points to 28%. How does this compare to its competitors? Let's take a look at the latest quarters:

Company

Market Cap

Gross Margin

Winn-Dixie Stores

$982 million

28.0%

Kroger (NYSE: KR)

$17.9 billion

26.2%

Safeway (NYSE: SWY)

$13.7 billion

28.8%

SUPERVALU (NYSE: SVU)

$7.2 billion

24.8%

Note: Data from press releases and Capital IQ, a division of Standard and Poor's.

As you can see, Winn-Dixie's gross margin slightly lags Safeway's, but is head and shoulders above Kroger and SUPERVALU. While it's true that gross margin is relative and depends heavily on product mix, we Fools love to see a company turn more of its revenue into profit, as long as it's not at the expense of same-store sales.

Same-store sales ... right on cue!
Winn-Dixie increased same-store sales by 2.2% over the prior year's quarter. In addition, the company is on track to remodel 75 stores during 2008. Management expects the remodeling program to modernize stores by "dramatically improving their appearance, heightening their focus on fresh, high-quality products and enhancing the overall shopping experience." This program has shown itself to be extremely effective, improving remodeled store average sales by 12%.

Foolish conclusion
This quarters' earnings surprise marks the fifth quarter in a row in which the company has posted a positive surprise. The company also continues to increase its sales and gross margin, in spite of an environment where rising food and fuel costs present significant challenges. For that, this Fool tips his Foolish cap to Winn-Dixie leadership.

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Fool contributor Ryan Freund, who is ranked 110 out of more than 100,000 participants in CAPS, does not own shares in any of the companies listed. The Fool's disclosure policy is always a winner.