Winmark Corporation — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 29, 2014; the comparable period ended March 30, 2013. Winmark franchises five value-oriented retail brands and operates middle-market and small-ticket equipment-leasing businesses. It had 1,021 franchised stores and a $40.0 million net leasing portfolio at quarter-end.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $14.55 million | $13.15 million |
| Operating income | $7.43 million | $6.68 million |
| Operating margin | 51.1% | 50.8% |
| Net income | $4.55 million | $4.06 million |
| Net margin | 31.3% | 30.8% |
| Diluted EPS | $0.86 | $0.78 |
| Cash from operations | $7.00 million | $6.72 million |
- Revenue rose 10.7%. Royalties increased 4.0% to $8.81 million; leasing income rose to $4.38 million from $3.41 million. Franchise fees declined to $349,000 from $415,000.
- Franchising segment contribution was $4.70 million, versus $4.83 million; leasing contribution increased to $2.73 million from $1.84 million.
- SG&A increased 8.7% to $6.02 million, primarily due to compensation and benefits. The credit-loss provision rose to $38,900 from $13,800.
- Investing activities used $2.42 million, including $6.50 million for lease equipment purchases and $4.27 million of principal collections. Cash declined by $8.23 million to $2.41 million.
- At March 29, current assets were $22.10 million and current liabilities $26.45 million; the company reported a current ratio of 0.8. Shareholders’ equity was $16.22 million, down from $38.14 million at December 28, 2013.
Material changes, liquidity and capital
Winmark paid a $5.00-per-share special dividend totaling $25.8 million, plus its regular $0.05-per-share dividend. Financing activities also included $1.08 million of stock repurchases and $14.0 million of line-of-credit borrowings; the special dividend was funded partly with cash and partly with borrowing. The line has a $35.0 million commitment, with $21.0 million available at quarter-end. Borrowings carried rates of 2.40%–3.25%; the credit facility was extended to February 28, 2018. The company was in compliance with its financial covenants.
Management believes cash, franchising cash flow, discounted lease financing and the credit line will adequately fund planned operations through 2014. This is management’s stated expectation, not quantified earnings guidance. A 1 percentage-point increase in short-term interest rates would reduce annual pretax earnings by an estimated $140,000; no interest-rate derivatives were in place.
Outlook, risks and other notable items
- Management cites franchisee support, new store openings, lease originations and write-offs, and control of SG&A as key drivers of operating income. It renewed 29 of 30 franchise agreements eligible for renewal; 16 stores opened and none closed during the quarter.
- Lease portfolio growth and higher equipment purchases support leasing activity, but results depend on lease income recognition, customer credit quality and recoveries. One middle-market lease balance of $322,300 was on non-accrual at quarter-end; no accruing balances were reported as 61 or more days delinquent.
- Management cautions that interim results are not necessarily indicative of full-year results. Actual outcomes may differ from forward-looking statements; the filing reports no material change to the prior annual report’s risk factors.
- No material litigation, off-balance-sheet arrangements or material foreign-currency exposure was reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Confirm how the large special dividend and related $14.0 million borrowing affect ongoing liquidity, covenant headroom and capital allocation.
- Monitor cash, current liabilities and the current ratio following the dividend payment.
- Track lease portfolio growth, non-accruals, credit-loss allowance and equipment originations against collections.
- Assess whether royalty growth, franchise renewals and new-store openings support future franchising revenue while SG&A rises.
- Review the credit facility’s borrowing-base limits, floating-rate exposure and management’s 2014 liquidity assumptions.