Winmark Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended April 1, 2023; comparable period ended March 26, 2022. Interim financial statements are unaudited. Winmark franchises five resale retail brands and operates a middle-market equipment-leasing business that it is winding down. It reported 1,297 franchised stores at quarter-end.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $20.5 million | $20.0 million |
| Operating income | $12.4 million | $13.4 million |
| Operating margin | 60.4% | 67.0% |
| Net income | $8.9 million | $9.9 million |
| Diluted EPS | $2.49 | $2.65 |
| Cash from operations | $13.9 million | $13.3 million |
- Royalties were $16.7 million, up 8.8%; leasing income was $1.6 million, down from $2.9 million.
- SG&A was $6.6 million, up 19.8%. Interest expense rose to $0.8 million from $0.5 million. Net margin was 43.6%, compared with 49.1%.
- Cash, cash equivalents and restricted cash totaled $24.6 million at April 1, 2023, versus $13.7 million at December 31, 2022. Operating cash flow was comparable year over year; the filing reports $2.5 million of cash-flow benefit from changes in income taxes receivable/payable.
- Debt included $30.0 million in delayed-draw term loans and $42.4 million principal outstanding under the Prudential note agreement; no revolving loans were outstanding, leaving $20.0 million of revolving capacity. The company reported compliance with debt covenants. Shareholders’ deficit was $54.0 million.
- Financing activities used $2.9 million, including $2.4 million of dividends and $1.1 million of note payments, partly offset by $0.6 million from option exercises. The quarterly dividend was $0.70 per share.
Changes and management commentary
- Total revenue increased about 2.4%, as royalty growth and higher merchandise sales more than offset lower leasing income. Management attributed royalty growth to higher franchisee retail sales and additional stores compared with the year-earlier period.
- Operating income and net income declined despite revenue growth. Management attributed higher SG&A primarily to returning to in-person apparel-brand conferences; franchise-segment operating income was essentially unchanged at $11.2 million.
- Winmark renewed all 30 franchise agreements available for renewal in the quarter. Five stores opened and three closed, for net growth of two stores.
- The leasing portfolio is in an orderly run-off, with no new leasing customers being solicited. Management expects leasing income net of leasing expense to continue declining.
Outlook, risks and unusual items
- Management believes cash on hand, business cash flows, the revolving credit facility and the Prudential shelf agreement will be adequate to fund planned operations through 2023. No specific earnings or revenue guidance was provided.
- Management cautioned that debt service capacity depends on future performance; refinancing, asset sales, additional borrowing or equity issuance may be required if cash is insufficient, and may not be available on acceptable terms.
- Interest-rate exposure includes potential refinancing risk; no revolving loans or interest-rate derivatives were in place at quarter-end. Foreign-currency movements also present exposure, though transaction gains and losses were not material in the quarter.
- The company added a risk disclosure that deposits may exceed the FDIC insurance limit, exposing it to potential losses if a financial institution fails. It reported no material litigation and no material changes to other previously disclosed risk factors.
- Unusual period comparison: Q1 2022 leasing income included $1.3 million of selling profit at the commencement of sales-type leases; none was recorded in Q1 2023. In-person apparel conferences also resumed in Q1 2023.
Important facts for investors to verify
- Whether franchisee sales and royalty growth continue, and whether franchise openings and renewals sustain store growth.
- How quickly the leasing portfolio runs off and how much its declining contribution affects consolidated results.
- Whether SG&A growth moderates and operating margins stabilize after the conference-related increase.
- Debt maturity, refinancing and covenant capacity, including the effect of interest rates and available liquidity.
- The amount and concentration of cash deposits above FDIC insurance limits.
- Whether operating cash flow remains strong after considering working-capital and tax-payment timing.