Winmark Corp. Q1 2009 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the three-month period ended March 28, 2009. Winmark Corporation operates two primary segments: franchising (brands include Play It Again Sports, Once Upon A Child, Plato's Closet, Music Go Round, and Wirth Business Credit) and equipment leasing (Winmark Capital and Wirth Business Credit). The company reported 909 total franchises/territories as of the period end.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenue | $9,250,000 | $8,877,400 |
| Net Income | $1,413,700 | $937,300 |
| Earnings Per Share (Diluted) | $0.26 | $0.17 |
| Operating Cash Flow | $2,813,600 | $1,580,900 |
| Cash and Equivalents (End of Period) | $5,005,600 | $1,541,100 |
| Total Debt (Line of Credit + Notes) | $35,363,300 | N/A |
| Current Ratio | 1.42 | 1.10 |
Note: Total Debt calculated as $12.15M Line of Credit + $23.17M Subordinated Notes.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 4.2% year-over-year, driven primarily by a 38.4% surge in leasing income ($2.7M vs $1.95M) and a 5.7% increase in royalties.
- Profitability: Net income rose 50.8% to $1.41M. Operating income increased 38.5% to $2.67M, aided by a 5.8% reduction in Selling, General, and Administrative (SG&A) expenses.
- Franchise Fees: Franchise fees dropped significantly by 71.6% ($150k vs $527.5k) due to 21 fewer franchise openings compared to the prior year.
- Merchandise Sales: Sales to franchisees declined 33.0% to $625.4k as the company shifted strategy to have franchisees purchase directly from vendors.
- Credit Losses: Provision for credit losses increased to $419.7k (from $385.1k) due to higher delinquencies in the small-ticket financing business.
Outlook, Risks, and Management Commentary
- Liquidity: Management believes cash on hand, operating cash flow, and access to credit facilities ($42.8M available under the $55M line of credit) are adequate to fund 2009 operations.
- Leasing Strategy: Equipment purchases for leases decreased to $4.9M (from $7.8M) due to the economic environment and tightened credit standards in the small-ticket segment.
- Stock Repurchases: The company repurchased 87,941 shares for $905,900 during the quarter. Approximately 486,600 shares remain available under the current repurchase plan.
- Risks: Key risks include the impact of the general economic environment on franchisee sales and leasing demand, as well as credit losses in the leasing portfolio. The company has no material litigation.
- Related Party Transactions: CEO John L. Morgan and his spouse purchased $1.9M in subordinated notes during the quarter.
Investor Verification Checklist
- Verify the sustainability of the 38.4% leasing income growth given the reduction in new equipment purchases.
- Monitor the trend in the provision for credit losses, which increased despite tighter credit standards.
- Assess the impact of the 71.6% drop in franchise fees on future royalty revenue streams.
- Review the $4.3M investment in private companies (Tomsten and BridgeFunds) for potential impairment risks.
- Confirm compliance with debt covenants, specifically debt service coverage and tangible net worth requirements.