Winmark Corporation 10-Q Summary
Business Context and Reporting Period
Winmark Corporation operates a franchise business model licensing retail brands including Play It Again Sports, Once Upon A Child, Music Go Round, and Plato's Closet. The company also sells inventory to franchisees and operates a limited number of corporate-owned stores. This report covers the quarterly period ended June 29, 2002, and the six months ended on that date.
Key Financial Metrics
| Metric | Three Months Ended June 29, 2002 | Six Months Ended June 29, 2002 |
|---|---|---|
| Total Revenue | $8,334,800 | $17,546,000 |
| Net Income | $724,000 | $1,799,900 |
| Net Income Per Share (Diluted) | $0.12 | $0.30 |
| Operating Cash Flow | N/A | $2,333,300 |
| Cash and Investments | $6,529,800 (as of June 29, 2002) | |
| Current Ratio | 2.71 to 1.0 | |
| Long-Term Debt | $69,500 (excluding current maturities) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 1.7% for the quarter and 5.8% for the six-month period compared to 2001. Merchandise sales dropped significantly due to a strategic shift encouraging franchisees to buy directly from vendors and a reduction in the number of open stores.
- Profitability Increase: Despite lower revenue, Net Income increased 12.8% for the quarter and 32.8% for the six-month period. This was driven by a substantial reduction in interest expense (from net expense of $179,800 in Q2 2001 to net income of $65,900 in Q2 2002) and improved retail margins.
- Store Count: Total store count decreased from 841 to 839 over the six-month period, with net closures in Play It Again Sports and Once Upon A Child offset by openings in Plato's Closet.
- Expense Management: Selling, General, and Administrative (SG&A) expenses increased slightly for the quarter but decreased for the six-month period, aided by the closure of corporate-owned stores.
Outlook, Risks, and Unusual Items
- Strategic Investment: On July 30, 2002, the company executed an agreement to invest $6 million in Tomsten's Inc. (parent of "Archiver's" retail chain) over 13 months, acquiring approximately a 20% stake. The CEO has joined Tomsten's Board.
- Liquidity: The company maintains a $7.5 million credit facility with Rush River Group, LLC, with $2.5 million remaining availability. Management believes current cash, investments, and the credit facility are sufficient to meet obligations, including the new investment.
- Contingencies: The company remains a guarantor on leases for sold or closed stores, with potential liability up to $163,800.
- Accounting Changes: The company adopted SFAS No. 142, ceasing goodwill amortization effective January 1, 2002. This had no material impact on reported net income for the period.
- Auditor Change: The company filed an 8-K on June 25, 2002, regarding a change in independent auditors.
Investor Verification Checklist
- Verify the impact of the $6 million investment in Tomsten's Inc. on future cash flow and capital allocation.
- Monitor the trend of merchandise sales as franchisees continue to bypass the buying group.
- Review the status of the $2.5 million remaining borrowing capacity under the Rush River Facility.
- Assess the sustainability of the improved retail margins (cost of goods sold decreased to 50.4% of retail revenue in Q2 2002).
- Confirm the details of the change in independent auditors filed on Form 8-K.