Shares in Winn-Dixie suffered yesterday (28 July) after the US retailer announced plans to close 30 “under-performing” stores, a move it hopes will cut costs, improve efficiency, and “build the right foundation” for the business in the future.
Announcing the closures, Winn-Dixie cited a “difficult economic and retail environment” in the south-east of the US, where the retailer operates its stores.
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Shares dropped 2.94% to $9.92 at close of trading yesterday.
Winn-Dixie’s business is suffering from the economic and, with the oil spill in the Gulf of Mexico, the environmental problems in the region.
Indeed, in May, Winn-Dixie posted a 2.3% decline in sales during the third quarter of its fiscal year, and a 2.2% drop in identical-store sales.
Jefferies & Co analyst Scott Mushkin told just-food the pressure on Winn-Dixie’s sales is likely to have continued into its fiscal fourth quarter.
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By GlobalData“We think sales were under considerable pressure in the full-year/fourth quarter from the still very difficult Florida economy (unemployment near 12%) and the impact of the Gulf oil spill on tourism and economic activity in the region.”
Around 120 job losses are expected to come from Winn-Dixie’s cuts in corporate and field support staff, and will be in addition to the posts lost from the store closures, which the company has not yet detailed.
As a result, the firm said it expects to achieve annualised savings in the range of US$12m to $17m, which should begin to be realised after the end of the first quarter of fiscal 2011 due to timing and transition costs.
Some retail analysts believe Winn-Dixie’s move may make the retailer more competitive in the long term.
Jonathan Feeney, an analyst with Janney Montgomery Scott, believes the cuts will ultimately pay off for the retailer.
“These [store closures] represent a pretty decent chunk of its footprint at 5.8%. While it will cede market share in the near-term, we like this move from a strategic standpoint, as it will lower Winn’s cost structure, improve the store base, and yield savings likely to be reinvested in remodels, which generated a healthy 800 basis points of sales lift last quarter,” Feeney said.
In addition, Feeney believes the move could have good implications for the wider retail industry in the region.
“These store closures should remove roughly $330m in sales from the Southeast, thus offering some improvement to the competitive dynamic there for Wal-Mart, Publix and Food Lion,” Feeney said.
“We think this plan could be more relevant as a harbinger of a more capital-disciplined food retail industry. While Wal-Mart and other alternate retailers have aggressively expanded food retailing capacity over the last two decades, the number of traditional grocery stores has stayed relatively elevated, supported in part, we think, by the strategic value of a food retailer to commercial real estate developments. While the situation will vary by market, on a national basis, the industry appears over-stored and needs to consolidate,” Feeney added.
Winn-Dixie operates a web of stores comprising around 515 supermarkets, 401 pharmacies, 74 liquor stores and five fuel stations. Products include groceries, fresh fruits and vegetables, deli, cosmetics, meat food, seafood, wines and beers, bakery foods and fuel.
But while the retailer offers a broad product offering and value-added services, threats to the business come from rising manpower costs, a highly competitive market and of course the US recession, according to Global Data.
In the last few years the firm has completed remodels and upgrades on 51 of its namesake stores in the Jacksonville area, as well as launching a new brand position: “Fresh Checked Every Day”.
But a call from investors last year asked for cash to be returned to shareholders rather than it be spent on remodelling of stores.
So where does Winn-Dixie go from here?
“While Winn’s planned initiatives to close underperforming stores and streamline its operations should improve its cost structure and enhance its long-term competitiveness, it is still at a cost disadvantage to Wal-Mart and Publix, a reality that has become increasingly salient of late as Winn has apparently had to confront heightened competitive intensity from Wal-Mart from a position of inferior scale and cash flow,” said Feeney.
And while CEO Peter Lynch remains confident that the closures will “build the right foundation” for the business in the future, Mushkin also points to increased competition as a growing area of concern.
“This capable management team has worked its way through an exceptionally difficult environment,” Mushkin said. “The combination of targeted marketing, strong cost management and prudent promotional activity has allowed Winn-Dixie to put up decent results despite the revenue headwinds it has faced.
“At the same time, cost cuts can only go so deep, price gaps can only be so wide, and sustained traffic deceleration suggests the company is losing share to its rivals at a quickening pace,” he added.
