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Jax Daily Record Monday, Sep. 30, 201312:00 PM EST

Merger made W-D profitable

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by: Mark Basch Contributing Writer

When we last left Winn-Dixie Stores Inc. in March 2012, the Jacksonville-based supermarket chain was increasing sales but also losing money, with analysts wondering when and if it could turn that around.

Now 18 months after Winn-Dixie merged into Bi-Lo LLC, the combined company – which is taking on the new name Southeastern Grocers Inc. – is solidly profitable and continues to increase sales, although sales growth slowed in the second quarter this year.

Meanwhile, Bi-Lo was able to turn around after emerging from Chapter 11 bankruptcy in 2010 and has been profitable every year. The merger with Winn-Dixie only made it more profitable.

We haven't been able to check up on Winn-Dixie's progress for the past year and a half because the merger made it a privately owned company. We've never really known anything about Bi-Lo's finances because that supermarket chain has been privately owned all along since it emerged from bankruptcy.

However, Southeastern Grocers, the holding company for Winn-Dixie and Bi-Lo, filed plans last week for an initial public offering, so now we can follow the financial progress of a company that is competing with CSX Corp. for the title of largest company headquartered in Jacksonville.

Yes, we didn't even know for sure how big Southeastern Grocers was, but we learned in the IPO filing that it produced revenue of $5.6 billion in the first half of this year. That puts it slightly behind CSX's $6 billion in revenue.

In addition to the 685 supermarkets it currently operates, Southeastern Grocers has an agreement in place to acquire 155 stores from the Delhaize Group that produced $1.7 billion in revenue last year, the filing said.

That deal is expected to close in the first quarter of 2014, and that could put the company over the top in Jacksonville.

We also learned that Southeastern Grocers produced net income of $208 million in the first two quarters this year. That's quite a difference from the old Winn-Dixie, which recorded a net loss of $100.8 million in the six-month period ended Jan. 12, 2012, which was its last financial report before the merger.

The IPO filing shows that Winn-Dixie continued to bleed until the merger was completed, losing $22.3 million from Jan. 12-March 9, 2012.

As in any merger, the combined company has improved its finances by cutting costs. "We have achieved over $180 million of annual run-rate cost savings from operational improvements and synergies to date and expect to realize moderate additional cost savings prior to completion of the integration," the IPO filing said.

It doesn't say anything about the number of jobs that have been cut but it says the integration of the two companies is still ongoing. Bi-Lo moved its headquarters from Greenville, S.C., to Winn-Dixie's Jacksonville offices after the merger.

"Severance resulting from the headquarters relocation will be paid as certain jobs are eliminated continuing through fiscal 2013," the filing said.

It also said that the company has reduced operating expenses with "a decrease in store labor and benefits in Winn-Dixie stores as these stores were integrated into the Bi-Lo store labor model."

It didn't give details of the Bi-Lo model.

Bi-Lo employs about 58,000 people total, including 38,000 who work on a part-time basis, the filing said.

Winn-Dixie's operating expenses were 29.1 percent of sales in the six months ended Jan. 12, 2012, and were 31.2 percent of sales in the two months before the merger.

With the integration ongoing, Southeastern Grocer's operating expenses were down to 23.5 percent of sales in the first six months of this year. That's obviously helping profitability.

The company feels so good about its profitability that the IPO filing said it expects to "implement a regular cash dividend program."

The old Winn-Dixie stopped paying dividends in 2004, before going through Chapter 11 bankruptcy reorganization in 2005 and 2006.

Although expenses were high, Winn-Dixie was growing sales before the merger and it continued over the last 18 months.

Southeastern Grocer boasts in the IPO filing that "we have achieved average pro forma comparable store sales growth of 3.1 percent over our last six consecutive quarters."

Comparable store sales – sales at stores open for more than one year – are a key indicator of a retailer's performance.

However, the filing also shows that comparable sales growth dropped from 3 percent in the first quarter this year to 0.1 percent in the second quarter, which is the most recent data available.

The filing does not give a reason for the slow growth in the second quarter and because of an SEC-mandated quiet period after a company files to sell stock, company officials won't be able to publicly discuss sales trends.

The good news is that now that the successor to Winn-Dixie is going public again, we will be able to track its financial trends on an ongoing basis.

Could Body Central be taken private?

While the former Winn-Dixie is going public after a year and a half as a private company, one analyst is speculating that Body Central Corp. could be taken private just three years after going public.

Jefferies analyst Randal Konik said in a report last week that a pullback in stock prices of several specialty retailers makes them candidates for a leveraged buyout.

"Over the past year and a half, we have seen increased LBO activity within the specialty retail space, the most recent takeout announcement back in May for Rue 21," Konik said.

"We believe the group remains on the radar for future leveraged buyouts given the companies' significant cash balances, little to no debt and business models with consistent cash generation," he said.

After analyzing the companies, Konik said Aeropostale Inc. is the most likely candidate for an LBO, but other strong candidates are American Eagle Outfitters Inc. and Jacksonville-based Body Central.

After reporting a surprising second-quarter loss, Body Central's stock has dropped to record lows recently, trading between about $6 and $6.75 over the past month.

Konik said he would expect a 30 percent "takeout premium above where each stock is trading today" in a buyout.

Konik has a "hold" rating on Body Central but said he is "constructive" overall on the retailers.

"We think the retail stocks screen as attractive given the strong balance sheets and free cash flow profiles of most companies," he said.

He also thinks retailers will benefit from "a more optimistic consumer and pent-up demand heading toward the holiday season."

FIS said to be selling payment unit

Bloomberg News reported last week that Jacksonville-based Fidelity National Information Services Inc., or FIS, wants to sell its electronic benefits transfer business.

The unit provides technology services for food stamp payments, Bloomberg said.

Citing "people with knowledge of the matter," Bloomberg said first-round bids on the unit are due next week and they could bring in more than $200 million to FIS.

It said the business generates about $25 million in earnings before interest, taxes, depreciation and amortization each year.

FIS, which provides technology services for financial institutions, does not provide information on this business in its financial reports.

Its annual report said the company's payment solutions group "provides a comprehensive set of software and services for EFT, network, card processing, image, bill payment and government solutions for North America."

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