Winmark Corporation — FY2021 Form 10-K
Business context and reporting period. Winmark franchises five resale brands: Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round. It also operates a middle-market equipment-leasing business that it is winding down. This annual filing covers the 52-week fiscal year ended December 25, 2021; comparisons are with the 52-week fiscal year ended December 26, 2020.
Financial performance
- Revenue: $78.2 million, up 18.4% from $66.1 million. Royalties rose 31.3% to $60.8 million, reflecting stronger franchisee sales as stores recovered from pandemic-related closures and traffic declines. Leasing income fell 23.0% to $11.1 million.
- Profit and margins: Operating income increased 27.7% to $51.3 million; operating margin was 65.6%, versus 60.8%. Net income increased 33.9% to $39.9 million; net margin was 51.0%, versus 45.1%. Diluted EPS was $10.48, compared with $7.72. The effective tax rate declined to 19.9% from 22.6%.
- Segment results: Franchising revenue was $67.1 million, and segment contribution increased 40.6% to $44.8 million. Leasing revenue was $11.1 million, and segment contribution decreased 21.9% to $6.5 million.
- Cash flow: Operating activities provided $48.3 million, compared with $43.2 million. Investing activities used $0.3 million, down from $4.2 million, primarily as equipment purchases for lease customers fell to $0.2 million from $4.1 million. Financing activities used $43.3 million.
- Liquidity: Cash and restricted cash totaled $11.4 million at year-end, versus $6.7 million. Current assets were $17.4 million and current liabilities $10.0 million.
- Debt: Notes payable had $47.7 million of principal outstanding; the balance-sheet carrying amount was approximately $47.6 million. The company issued $30.0 million of Series C notes in 2021. Its $25.0 million revolving credit facility had no balance drawn, leaving $25.0 million available. Winmark reported compliance with debt covenants.
Material changes and capital allocation
- System-wide franchise sales rose to $1.407 billion from $1.075 billion in 2020, exceeding the 2019 level of $1.203 billion. The 2020 comparison was affected by pandemic-related closures and reduced traffic.
- Franchises increased from 1,264 to 1,271: 16 opened and nine closed. Winmark renewed 115 of 116 agreements due for renewal, or 99%; it had 46 signed agreements, most expected to open in 2022.
- Winmark paid $33.2 million in dividends, including a $7.50-per-share special dividend, and repurchased 225,839 shares for $44.2 million. It also received $30.0 million from the Series C note issuance. Retained earnings became a $39.1 million accumulated deficit, principally in the context of substantial shareholder distributions and repurchases.
- The leasing portfolio declined to $3.1 million from $13.3 million. The company stopped soliciting new middle-market leasing customers in May 2021 and plans an orderly run-off.
Outlook, risks and unusual items
- Management said cash on hand, cash generated by operations and the revolving facility were expected to fund planned operations through 2022. No specific revenue or earnings guidance was provided.
- Management expects leasing income, related cash flows and portfolio size to continue declining during the run-off.
- COVID-19 effects remained uncertain, including possible renewed store restrictions, shifts in consumer behavior and channel preferences, and changes in demand between periods. Management noted increased e-commerce demand and the risk of failing to capitalize on it.
- Key risks include franchise renewals and openings, competition from online and physical retailers, used-merchandise supply, franchisee receivable collections, lease credit losses, debt covenant compliance, access to financing, and data security. The company also disclosed foreign-exchange exposure: a 10% currency-rate movement was estimated to affect annual pretax earnings by approximately $480,000.
- The filing reports no material litigation or unresolved staff comments. The independent auditor issued an unqualified opinion and reported no critical audit matters. Management concluded disclosure controls and internal control over financial reporting were effective; the company was not required to obtain an auditor attestation on internal controls.
Important facts for investors to verify
- Whether 2021 franchise sales and royalty growth persist, especially against a normalized post-pandemic comparison.
- Opening progress for the 46 signed franchise agreements and renewal outcomes for the 144 agreements due in 2022.
- The pace and financial effects of the leasing portfolio run-off, including lease collections and residual values.
- Debt-service capacity after the special dividend and repurchases, covenant headroom, and the terms and repayment schedule of the Series C notes.
- Whether e-commerce growth, franchisee operating performance and used-goods supply support continued system-wide sales growth.