Winmark Corp. Q1 2008 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarter ended March 29, 2008. 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 Leasing (equipment leasing via Winmark Capital and Wirth Business Credit). The company reported a net income of $937,300 for the period.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Revenue | $8,877,400 | $7,626,900 |
| Net Income | $937,300 | $629,800 |
| Earnings Per Share (Diluted) | $0.17 | $0.11 |
| Operating Cash Flow | $1,458,700 | $788,200 |
| Cash and Equivalents | $1,541,100 | $1,020,600 |
| Total Debt (Line of Credit + Notes) | $36,544,900 | $36,654,700 |
| Current Ratio | 1.10 | 0.78 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 16.4% year-over-year, driven primarily by a 151.2% surge in leasing income ($1.95M vs $0.78M) and a 75.8% increase in franchise fees due to new store openings.
- Profitability: Net income rose 48.8% to $937,300. Operating income increased 49.3% to $1.93M.
- Expense Increases: Selling, General, and Administrative (SG&A) expenses rose 6.3% due to higher advertising and sales commissions. The provision for credit losses increased 236.3% to $385,100, reflecting higher leasing originations and charge-offs.
- Merchandise Sales Decline: Direct franchisee merchandise sales dropped 25.9% as management strategically shifted franchisees to purchase directly from vendors.
- Investment Losses: Loss from equity investments (Tomsten) increased to $75,800 from $54,800.
Outlook, Risks, and Management Commentary
- Liquidity: Management believes cash on hand, operating cash flow, and credit facilities are adequate to fund 2008 operations. The current ratio improved to 1.10 from 0.78.
- Debt Capacity: The company has a $25M credit facility (expandable to $50M) with $15.6M outstanding. It also has $20.9M in renewable unsecured subordinated notes outstanding.
- Franchise Activity: The company opened 28 new franchises/territories in Q1 2008 compared to 15 in Q1 2007. Renewal activity was strong with 4 of 4 available agreements renewed.
- Risks: Key risks include interest rate fluctuations on variable-rate debt, credit losses in the leasing portfolio, and the performance of franchisees which drives royalty revenue. The company holds illiquid long-term investments ($7.4M) in Tomsten and BridgeFunds.
- Stock Repurchases: The company repurchased 1,561 shares in Q1 2008. Approximately 183,193 shares remain available under the current repurchase plan.
Investor Verification Checklist
- Verify the sustainability of the 151% increase in leasing income against the 236% rise in credit loss provisions.
- Confirm the status of the $7.4M long-term investment in Tomsten, which is accounted for under the equity method and contributed to investment losses.
- Monitor the utilization of the $25M credit facility and the weighted average interest rate on the $20.9M subordinated notes (9.44%).
- Review the trend in "Direct Franchisee Sales" to ensure the strategic shift to vendor-direct purchasing does not negatively impact overall franchisee health.
- Assess the impact of the $809,700 increase in income tax receivable on future cash flow availability.