Winmark Corp. 10-Q Summary: Quarter Ended June 27, 2009
Business Context and Reporting Period
This report covers the quarterly period ended June 27, 2009, and the six-month period ended on the same date. 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 910 franchises and a leasing portfolio of $42.1 million as of the period end.
Key Financial Metrics
| Metric | Six Months Ended June 27, 2009 | Six Months Ended June 28, 2008 |
|---|---|---|
| Total Revenue | $18,088,100 | $17,594,700 |
| Net Income | $2,609,000 | $1,867,800 |
| Earnings Per Share (Diluted) | $0.49 | $0.34 |
| Operating Cash Flow | $7,289,000 | $3,437,300 |
| Cash and Equivalents (End of Period) | $8,702,300 | $2,585,200 |
| Total Debt (Line of Credit + Notes) | $34,592,300 | $34,430,600 |
| Current Ratio | 1.6:1 | 1.6:1 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 2.8% year-over-year for the six-month period. Leasing income rose significantly by 25.5% to $4.84 million, while royalties increased 5.7% to $11.24 million. Conversely, franchise fees dropped 57.9% due to fewer new store openings, and merchandise sales fell 31.6% due to a strategic shift toward direct vendor purchasing by franchisees.
- Profitability: Net income increased 39.7% to $2.61 million. Operating income rose to $4.91 million, driven by a 16.7% increase in franchising segment contribution and a reduction in the leasing segment's operating loss.
- Expense Management: Selling, General, and Administrative (SG&A) expenses decreased 5.9% to $9.71 million, primarily due to reduced advertising spend. However, the provision for credit losses increased 56.5% to $1.02 million, reflecting higher delinquencies in the small-ticket financing business.
- Liquidity: Cash and cash equivalents grew from $2.14 million to $8.70 million, bolstered by strong operating cash flows and net proceeds from subordinated notes.
Outlook, Risks, and Management Commentary
Management attributes the increase in leasing income to a larger portfolio and the classification of certain leases as sales-type leases. However, the company notes that equipment purchases for leases decreased to $8.7 million from $12.3 million in the prior year due to the unfavorable economic environment and tightened credit standards. The company maintains a $55.0 million revolving credit facility with $43.8 million available and $11.2 million outstanding. Management believes current capital resources are adequate to fund operations for 2009. Key risks include the impact of the general economic environment on franchisee sales and the continued volatility in credit losses within the leasing segment.
Investor Verification Checklist
- Credit Loss Trends: Verify the sustainability of the 56.5% increase in the provision for credit losses and its impact on future leasing margins.
- Franchise Fee Volatility: Assess the long-term impact of the 57.9% decline in franchise fees on revenue growth, given the reliance on new store openings.
- Debt Structure: Review the maturity schedule of the $23.4 million in renewable unsecured subordinated notes, which carry interest rates ranging from 6.51% to 10.51%.
- Related Party Transactions: Note the $1.9 million in subordinated notes purchased by the CEO and his spouse in early 2009.
- Stock Repurchases: Confirm the remaining capacity of the stock repurchase plan, which has 443,520 shares remaining out of an authorized 4.5 million.