Winmark Corp. 10-Q Summary: Quarter Ended June 28, 2008
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Winmark Corporation for the three and six months ended June 28, 2008. Winmark 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 operates on a 52/53-week fiscal year.
Key Financial Metrics
| Metric | Six Months Ended June 28, 2008 |
Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenue | $17,594,700 | $15,189,500 |
| Net Income | $1,867,800 | $1,060,300 |
| Earnings Per Share (Diluted) | $0.34 | $0.19 |
| Operating Cash Flow | $3,319,100 | $2,217,500 |
| Cash and Equivalents (End of Period) | $2,585,200 | $1,550,300 |
| Total Debt (Line of Credit + Notes) | $36,140,400 | $29,675,500 |
| Current Ratio | 1.47 | 0.90 |
Note: Total Debt calculated as Current Line of Credit ($3.74M) + Long-term Line of Credit ($11.20M) + Current Subordinated Notes ($4.22M) + Long-term Subordinated Notes ($17.08M).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 15.8% year-over-year (YoY) for the six-month period, driven primarily by a 118% increase in leasing income ($3.86M vs. $1.77M) and a 6.4% increase in royalties.
- Profitability: Net income increased 76.2% YoY. Operating income rose to $3.83M from $2.42M.
- Leasing Segment: The leasing portfolio grew to $45.5 million. While leasing income surged, the segment still reported an operating loss of $520K for the six months, though this was a 68% improvement over the prior year's loss of $1.63M.
- Franchising Segment: Franchise fees increased 27.3% due to new openings, particularly in the Wirth Business Credit system. However, merchandise sales to franchisees decreased 22.2% due to a strategic shift encouraging franchisees to buy directly from vendors.
- Debt Structure: The company amended its credit agreement on June 10, 2008, increasing the line of credit capacity to $55 million. Outstanding renewable subordinated notes totaled approximately $21.3 million.
Outlook, Risks, and Management Commentary
- Liquidity: Management believes cash on hand, operating cash flow, and access to the $55M credit facility and subordinated notes are sufficient to fund operations for 2008 and 2009.
- Equity Investment Risk: The company holds an 18.3% stake in Tomsten (parent of Archiver's). Due to a change in accounting treatment to the equity method, the company recorded a loss of $136,500 for the six months. Goodwill associated with this investment is $3.1 million.
- Credit Risk: Provision for credit losses in the leasing segment increased to $654,300 (from $279,700) due to higher originations and net charge-offs. One customer represents approximately 14% of total assets, though $2.3M of that commitment is secured by a letter of credit.
- Stock Repurchases: The company repurchased 17,364 shares in the first six months of 2008. Approximately 167,390 shares remain available under the current repurchase plan.
Investor Verification Checklist
- Leasing Concentration: Verify the creditworthiness of the single customer representing 14% of total assets and the status of the $2.3M letter of credit securing their commitment.
- Tomsten Investment: Review the financial health of Tomsten/Archiver's, as the company's equity method accounting exposes it to ongoing operating losses from this investment.
- Debt Covenants: Confirm compliance with the new tangible net worth requirement of $19.1 million (current tangible net worth is $26.8M) under the amended credit agreement.
- Franchisee Sales Trends: Monitor the long-term impact of the strategic decision to reduce direct merchandise sales to franchisees on overall revenue stability.
- Credit Loss Provisions: Assess the adequacy of the allowance for credit losses given the 134% increase in the provision for credit losses YoY.