Back in March, my Foolish colleague Chris Mallon reported some abysmal news at Winn-Dixie (NYSE:WIN). The regional grocery chain had just announced an $80 million second-quarter loss, complete with falling sales, contracting margins, a suspension of the firm's dividend, a credit downgrade to junk status, and the subsequent 40% collapse of the company's stock. However, there were reasons for optimism, and he concluded with an honest question: Is Winn-Dixie now a value play worthy of consideration?
Flash forward to August 19, when Seth Jayson dived into the firm's fourth-quarter numbers. The less-than-inspiring results included a 4.4% decline in comps and net income from continuing operations that fell from a $62 million gain to a $2.1 million loss. For the full year, the firm's earnings swung from a $239.2 million, or $1.70 gain, to a $100.4 million, or $0.71 loss. Ouch! With the stock trading near book value at $6.50, Seth also stated that brave investors might find Winn-Dixie's valuations compelling.
Today, Winn-Dixie is trading at around $4.50. The company's shares are bouncing back this morning but are still reeling from a steep 15% drop yesterday amid the fallout from Albertson's (NYSE:ABS) grim results. Despite the lack of any specific bad news, the stock has lost roughly one-third of its value in the two weeks since that mid-August release and is now hovering near 10-year lows.
Clearly, and with the benefit of hindsight, I can say that cheap stocks can always get cheaper. However, rather than question the conclusions that Chris and Seth reached, I am going to agree with them. For anyone who thought that Winn-Dixie held promise when trading near its book value of $6.45, it certainly looks even more attractive now at only two-thirds of book value with a market cap roughly one-twentieth of last year's $10.6 billion in sales.
Things are likely to get worse, though, before they get better at Winn-Dixie. It is rapidly losing market share to Wal-Mart (NYSE:WMT), and the privately owned Publix in its core Southeastern markets, and has not yet found a way to plug the leak. The company also plans to shutter 124 underperforming and noncore stores and discontinue manufacturing operations by next April -- both of which will take a toll on the top line, which has already declined for three consecutive years.
Capital expenditures made to renovate stores will also weigh heavily, but they are a must if Winn-Dixie is to transform its image. Substantial ongoing lease payments for stores that have already been closed but not yet sold are also a concern. Winn-Dixie can't even get a break with the weather; Hurricane Charley has already wreaked havoc, and Hurricane Frances is currently taking aim on the firm's Florida headquarters.
The company recently reached an agreement with its lenders to double the firm's credit line from $300 million to $600 million. By no means is this a cause for celebration, but it will help ensure that sufficient liquidity is available for restructuring should cash flow become a problem. Winn-Dixie's turnaround efforts have a long way to go, and it's going to be a bumpy ride, but if management can successfully execute plans to consolidate operations, revamp stores, and improve customer service, shareholders that kept their faith should one day be rewarded.
Fool contributor Nathan Slaughter owns none of the companies mentioned.
