Two years after Hurricane Katrina left dozens of its New Orleans supermarkets storm-beaten, looted and flooded, Winn-Dixie has shrewdly and aggressively reopened most of those stores.

While competitors reeled, the chain last year -- even as it reorganized under bankruptcy protection and closed hundreds of stores -- netted big sales gains in neighborhoods that remained sparsely served. Having reopened three stores in New Orleans during the past month alone, Winn-Dixie has replaced Wal-Mart Stores Inc. as the No. 1 grocer inside the city limits.

"We think we're gaining momentum in the New Orleans area," Chief Executive Peter Lynch said in an interview.

But Lynch also recognizes that New Orleans accounts for just a small fraction of Winn-Dixie's business. Two-thirds of the Jacksonville, Fla.-based chain's more than 500 stores spanning the Southeast are in its home state.

After closing 400 of its middle-market stores under a reorganization completed last November, Winn-Dixie is now in third place in Florida, behind Wal-Mart and Publix Super Markets Inc.

Critics have praised Winn-Dixie's nascent turnaround under Lynch, a former top executive at Albertson's Inc., who has cleaned up stores, improved service and begun a multiyear store-remodeling effort. But some fear the subprime-mortgage mess in Florida may hurt the grocer's bottom line.

Winn-Dixie shareholders have had a bumpy ride this year. Having sunk to a 52-week low of $10.92 last November, the shares shot up in May on better-than-expected quarterly margins, hitting a 52-week high of $32.40 in early June. Most of those gains were erased in late August, when Winn-Dixie said it expected a loss for the fiscal year ending June 2008. The shares rose 19 cents to $18.19 Thursday.

Aside from store-remodeling costs that are expected to erase profits for at least another year, much of the anxiety weighing on the shares stemmed from comments made during an August conference call, when Lynch noted heightened promotions at Wal-Mart and Publix. Those remarks, coupled with a lackluster forecast for margins this fall, helped ignite fears that a price war on groceries had begun in Florida. The fears are misplaced, Lynch said.

"A lot of construction was going on in Florida, things started to slow down, and we've seen a little bit of softening in sales," he said. "All I alluded to in that call is that some competitors overreacted to that -- this is not a price war and I'm not seeing that at all."

While the store upgrades have helped boost average transaction sizes, store traffic is still down. The problem, Lynch said, is that shoppers unaware of recent improvements are still driving past Winn-Dixie locations to get to competitors like Publix and Wal-Mart, which have done a good job of stealing away Winn-Dixie customers.

But Karen Short, an analyst at Friedman, Billings, Ramsey & Co. in New York, said, "Winn-Dixie is not as disadvantaged as people seem to think" as it squares off against competitors.

While "not dirt cheap" by some conventional measures, Winn-Dixie shares arguably are priced at least 30 percent lower than those of its supermarket peers, Short said. She cites Winn-Dixie's enterprise value, or market capitalization plus debt, to sales -- a commonly used measure for stocks of companies in the early stages of a turnaround.

Industry observers, however, remain divided.

Winn-Dixie's turnaround would have brighter prospects if it had begun it a year or two earlier, but Florida's troubled economy will drive shoppers to bigger chains with the resources to charge lower prices for meat and produce of the same or better quality, said Burt Flickinger III of Strategic Resource Group, a New York-based supermarket consultant.

Warehouse clubs, including Wal-Mart's Sam's Clubs, Costco Wholesale Corp. and BJ's Wholesale Clubs Inc., continue to expand in the region, Flickinger notes.

Accordingly, he likens Winn-Dixie CEO Lynch to Gen. Robert E. Lee, who led his small, scrappy Southern army to a series of impressive victories before eventually succumbing to a bigger, better-equipped adversary.

"Winn-Dixie looks like it may be heading for its own business version of Gettysburg," Flickinger said.