Winmark Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 24, 2022; unaudited interim results. Winmark franchises five resale retail brands and operates an equipment-leasing business that it is winding down. It reported 1,291 franchised stores at period-end.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Revenue | $21.2 million | $20.2 million | $60.3 million | $57.8 million |
| Operating income | $14.4 million | $13.8 million | $40.2 million | $38.4 million |
| Net income | $10.4 million | $10.1 million | $29.2 million | $28.3 million |
| Diluted EPS | $2.93 | $2.67 | $8.11 | $7.40 |
| Operating margin | 68.1% | 68.4% | 66.7% | 66.4% |
| Net margin | 49.0% | 50.0% | 48.5% | 49.0% |
- Q3 revenue rose 5.0%; royalties increased 9.1% to $17.9 million, attributed primarily to higher franchisee retail sales and more stores. Nine-month royalties also grew 9.1% to $49.2 million.
- Q3 net income increased 2.8%; nine-month net income increased 3.2%. Higher interest expense—$0.8 million in Q3 and $2.0 million year to date—partly offset operating growth.
- Leasing revenue declined to $1.8 million in Q3 from $2.3 million and to $5.8 million for nine months from $8.4 million. Management cited the smaller run-off portfolio, lower interest income and lower equipment sales.
- SG&A was $5.7 million in Q3, up 5.4%, and $16.7 million year to date, up 2.4%. Merchandise sales rose year to date to $2.7 million, with associated merchandise costs of $2.6 million.
Cash flow, balance sheet and capital allocation
- Nine-month operating cash flow was $34.2 million, compared with $35.0 million. Investing used $3.6 million, primarily for reacquired franchise rights; financing used $25.0 million.
- Cash, cash equivalents and restricted cash were $17.0 million at September 24, 2022, versus $37.6 million a year earlier. Current assets were $21.2 million and current liabilities $11.6 million.
- Debt included $30.0 million of delayed-draw term loans and $44.5 million principal under Prudential notes. No revolving loans were outstanding; $20.0 million of revolving capacity remained available. The company reported compliance with debt covenants. Debt is secured by substantially all assets.
- Winmark repurchased 222,307 shares for $48.3 million and paid $6.5 million in dividends during the first nine months. Shareholders’ equity was a deficit of $60.4 million, compared with a $39.1 million deficit at year-end 2021.
- On October 12, after quarter-end, the board declared a $3.00-per-share special dividend, approximately $10.3 million, payable December 1 and expected to be funded from cash on hand.
Material developments, outlook and risks
- In June, Winmark paid $3.54 million to reacquire franchise rights for 11 Play It Again Sports stores; the stores then entered individual 10-year franchise agreements.
- Management reported renewing all 114 franchise agreements that came up for renewal in the first nine months. It identified franchisee support and sales, new openings, and SG&A control as important to operating-income growth.
- Management said cash, operating cash generation and available facilities were expected to fund planned operations through 2023. Results for the first nine months are not necessarily indicative of full-year results; no specific earnings or revenue guidance was provided.
- The leasing portfolio is being run off, and management expects leasing income net of expense and portfolio size to continue declining. COVID-19 impacts remain uncertain. Other disclosed exposures include interest-rate risk and potential refinancing risk; the company had no interest-rate derivatives.
- The filing reported no material litigation, no material changes to the risk factors in the 2021 Form 10-K, and effective disclosure controls.
Important facts for investors to verify
- Whether royalty growth continues and what franchisee retail-sales trends, store openings and closures underlie it; the filing does not provide a clear quantified comparable-store sales measure.
- The pace and financial contribution of the leasing run-off, including remaining lease collections and residual-value outcomes.
- Debt service, interest costs and covenant headroom, particularly given secured borrowings and reliance on refinancing or other financing if cash proves insufficient.
- The impact of the $10.3 million special dividend on cash and liquidity after quarter-end, alongside ongoing repurchases and regular dividends.
- Whether operating cash flow remains sufficient to fund operations, debt obligations and capital returns; management’s liquidity outlook is a forward-looking estimate.