Winmark Corp. 10-Q Summary: Quarter Ended March 27, 2004
Business Context and Reporting Period
Winmark Corporation operates a franchise business model for retail stores under the brands Play It Again Sports, Once Upon A Child, Plato's Closet, and Music Go Round. As of March 27, 2004, the company had 786 franchised stores. The reporting period covers the three months ended March 27, 2004. The company has no outstanding debt.
Key Financial Metrics
| Metric | Q1 2004 | Q1 2003 |
|---|---|---|
| Total Revenue | $7,563,700 | $8,380,200 |
| Net Income | $1,360,300 | $1,122,200 |
| Earnings Per Share (Diluted) | $0.21 | $0.18 |
| Operating Cash Flow | $1,786,300 | $1,501,000 |
| Cash and Cash Equivalents | $5,823,400 | $4,153,300 |
| Current Ratio | 3.1 to 1.0 | 2.8 to 1.0 |
| Long-Term Debt | $0 | $0 |
Revenue Composition: Royalties accounted for 61.2% of revenue ($4.63M), while merchandise sales dropped to 34.4% ($2.60M). Franchise fees increased to $192,600.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 9.7% year-over-year, driven primarily by a 31.5% drop in merchandise sales. This was a strategic shift to have franchisees purchase directly from vendors and the sale of five company-owned Music Go Round stores.
- Profitability Increase: Despite lower revenue, Net Income increased 21.2% to $1.36M. Operating income rose 16.2% to $2.09M due to a 4.0% reduction in Selling, General, and Administrative (SG&A) expenses and a significant one-time gain.
- Non-Operating Items: The company recorded a $189,200 gain on the sale of marketable securities (compared to $2,900 in 2003) and a $24,300 loss from its equity investment in eFrame, LLC.
- Franchise Growth: Royalties increased 7.9% due to higher franchisee sales. Franchise fees grew 42.7% due to 10 new store openings. The company renewed 28 franchise agreements, representing 100% of those available for renewal.
Outlook, Risks, and Unusual Items
- Strategic Shifts: Management is reducing reliance on low-margin merchandise sales through the buying group and company-owned retail stores, focusing instead on high-margin royalties and franchise fees.
- Investments: The company made an additional $1.5 million equity investment in Tomsten, Inc. (parent of Archiver's) in March 2004, bringing total investment to $7.5 million. It also holds a 27.2% stake in eFrame, LLC.
- New Ventures: Subsequent to the period end, Winmark formed two subsidiaries: Winmark Business Solutions, Inc. and Winmark Capital Corporation, to support franchisees and conduct leasing operations.
- Risks: The company remains a guarantor on leases for sold or closed company-owned stores through 2006. Revenue recognition relies on estimates of franchisee sales; significant deviations could impact results.
Investor Verification Checklist
- Verify the sustainability of the 7.9% royalty growth amidst a strengthening economic environment.
- Confirm the impact of the strategic reduction in merchandise sales on long-term franchisee relationships.
- Monitor the performance of the $7.5 million investment in Tomsten, Inc. and the $1.5 million investment in eFrame, LLC.
- Review the progress of the newly formed leasing subsidiaries (Winmark Business Solutions and Winmark Capital) mentioned in subsequent events.
- Assess the adequacy of reserves for contingent liabilities related to guaranteed leases on sold stores.