Recent predictions that Winn-Dixie might not bounce back from six months of disappointing sales and stiff competition from Wal-Mart and Publix are starting to fall into place. On Jan. 30, the Jacksonville-Fla.-based grocery chain reported a 6 percent decline in total sales during its second quarter, down to $3.6 billion. Comparable store sales also decreased 6.8 percent in the same quarter. This marks the company's fourth sequential downturn in same store trends.

The dismal results prompted Standard & Poor's to reduce its corporate debt rating from BB to B--the fifth highest junk rating--saying the company's "rapid deterioration in operating performance," creates a high credit risk. Responding to the downgrade, Winn-Dixie said it plans to cut $100 million a year in expenses, including shutting down some of its under-performing stores in weak markets. "We are obviously disappointed in this quarter's results and we recognize that we cannot continue down this path," said Winn-Dixie's president and CEO Frank Lazaran on a recent conference call.

The company, which operates 1,078 stores in 12 southeastern states and the Bahamas, plans to do an "image makeover" of nearly 700 stores that need renovating, at a total cost of about $165 million. So far, Winn-Dixie has completed 98 makeovers and will fix up another 600 stores over the next year. In addition, the company is formulating a "strategic plan" to improve its image and long-term profitability. Winn-Dixie's largest landlord, Equity One--with 17 stores that make up one-tenth of the its portfolio--would likely take the hardest hit among public REITs if the retailer goes bankrupt.

"Although its business looks very weak, we believe Winn-Dixie may continue to struggle and stay current on its rents for months, even if a bankruptcy is the end result," says Piper Jaffray senior research analyst Andrew L. Rosivach in a recent report.