Business Context and Reporting Period
Company: Grow Biz International, Inc. (Note: Input metadata referenced "WINMARK CORP," but the filing text identifies the registrant as Grow Biz International, Inc.)
Reporting Period: Quarterly period ended June 26, 1999 (Six months ended June 26, 1999).
Business Model: Franchisor of retail concepts (e.g., Play It Again Sports, Once Upon A Child) that buy, sell, trade, and consign used and new merchandise. The company also operates corporate retail stores and sells inventory to franchisees via a buying group.
Key Financial Metrics
| Metric | Three Months Ended June 26, 1999 |
Six Months Ended June 26, 1999 |
|---|---|---|
| Total Revenue | $15,264,800 | $33,800,100 |
| Net Income (Loss) | $(121,300) | $(296,500) |
| Income from Operations | $88,200 | $70,900 |
| Operating Margin | 0.6% | 0.2% |
| Cash and Equivalents (End of Period) | $31,200 | $31,200 |
| Net Cash Used in Operating Activities | N/A | $(907,200) |
| Total Debt (Current + Long-Term) | $18,502,900 | $18,502,900 |
| Current Ratio | 1.4 to 1.0 | 1.4 to 1.0 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 35% year-over-year for the quarter ($15.3M vs. $23.5M) and 31% for the six-month period ($33.8M vs. $49.1M).
- Merchandise Sales: Buying group revenue dropped 49% (quarter) and 45.5% (six months) as franchisees purchased directly from vendors. Retail sales fell 31% (quarter) and 28.7% (six months), driven by a 27% comparable store sales decrease in "It's About Games" locations.
- Royalties: Decreased 7.7% for the quarter and 2.5% for six months. Excluding the sold "Disc Go Round" concept, royalties were consistent or slightly up.
- Franchise Fees: Declined significantly due to fewer new franchise openings (18 in Q2 1999 vs. 39 in Q2 1998).
- Profitability: The company reported a net loss for both periods, contrasting with net income of $4.2M (quarter) and $4.9M (six months) in 1998. The 1998 results included a one-time $5.2M gain on the sale of Disc Go Round.
- Margins: Retail gross margins deteriorated from 38.3% to 30.8% (quarter) due to a shift toward lower-margin new video game inventory and necessary markdowns.
- Liquidity: Cash and cash equivalents plummeted from $2.4M at year-end 1998 to $31,200 at June 26, 1999. This was driven by a $8.5M reduction in accounts payable and a $1.4M reduction in accrued liabilities.
- Interest Expense: Increased to $409,900 (quarter) and $780,700 (six months) from $74,000 and $207,900 respectively, due to lines of credit drawn for a stock repurchase plan.
Guidance, Outlook, and Risks
- Outlook: Management anticipates buying group sales trends will continue to decline for the remainder of 1999. Comparable store sales for "It's About Games" are expected to continue decreasing through the fourth quarter. The company intends to shift product mix back to higher-margin used video games.
- Liquidity Strategy: The company relies on a $10M revolving credit line (reduced to $7.5M max, extended to August 31, 1999) with $6.5M currently drawn. Management believes current cash and credit availability are adequate for operations.
- Year 2000 Compliance: Internal systems are being upgraded; costs incurred to date are $494,000. Risks include potential franchisee non-compliance affecting royalty revenue and vendor service interruptions.
- Litigation: A shareholder class action regarding a withdrawn stock exchange proposal was agreed to be dismissed without prejudice in August 1999.
Investor Verification Checklist
- Cash Position: Verify the sustainability of operations with only $31,200 in cash and a $6.5M draw on a credit line expiring/renewing in August 1999.
- Inventory Valuation: Assess the impact of the shift to new video game inventory on future gross margins and the necessity of further markdowns.
- Franchise Growth: Confirm the trend of declining new franchise openings and its long-term impact on royalty and fee revenue.
- Debt Covenants: Review the terms of the revolving credit facility renewal to ensure no restrictive covenants are triggered by the current loss position.
- Year 2000 Status: Monitor the completion of franchisee software conversions to mitigate potential revenue disruptions.