Winmark Corporation — Q3 2023 Form 10-Q
Business and period: Unaudited results for the quarter and nine months ended September 30, 2023, compared with periods ended September 24, 2022. Winmark franchises five resale retail brands and operates a middle-market equipment leasing business that it is winding down. It reported 1,312 franchised stores at quarter-end.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $22.3 million | $21.2 million | $63.2 million | $60.3 million |
| Operating income | $15.1 million | $14.4 million | $40.8 million | $40.2 million |
| Net income | $11.1 million | $10.4 million | $30.5 million | $29.2 million |
| Diluted EPS | $3.05 | $2.93 | $8.40 | $8.11 |
| Operating margin | 67.8% | 68.1% | 64.5% | 66.7% |
| Net margin | 50.0% | 49.0% | 48.2% | 48.5% |
Cash flow and liquidity: Nine-month operating cash flow was $35.2 million, versus $34.2 million. Investing activities used $0.3 million; financing activities used $8.0 million. Cash, cash equivalents and restricted cash were $40.6 million at September 30, 2023, compared with $17.0 million at September 24, 2022.
Debt: At quarter-end, the company had $30.0 million in delayed-draw term loans and $40.3 million of principal outstanding under its Prudential note agreement; no revolving loans were outstanding, and $20.0 million of revolving capacity remained. Debt is secured by substantially all assets. Winmark reported compliance with financial covenants. Management said available cash, operating cash flows, the credit line and shelf agreement were expected to fund planned operations through 2024.
Changes and operating developments
- Revenue increased 5.5% in Q3 and 4.8% for the nine-month period. Royalties rose 7.6% and 7.8%, respectively, primarily from higher franchisee retail sales and additional stores.
- SG&A increased 10.2% in Q3 and 12.1% year to date, reflecting advertising, outside services, conferences and other costs. Nine-month operating margin declined 2.2 percentage points.
- Leasing income fell to $3.9 million from $5.8 million for the nine-month period. Management cited lower equipment sales and selling profit; it expects leasing income net of leasing expense to decline as the portfolio runs off.
- Franchisees opened 28 stores and closed 11 in the first nine months. Of 125 agreements available for renewal, 124 were renewed (99%).
- Dividends paid totaled $8.0 million during the nine months. No shares were repurchased, and 78,600 shares remained authorized for repurchase.
Outlook, risks and unusual items
- On October 18, 2023, the board declared a $9.40-per-share special dividend, estimated at approximately $32.8 million and payable December 1, 2023, to shareholders of record November 15. The company expected to fund it with cash on hand.
- Management identified franchisee sales, store growth and control of SG&A as important to operating-income growth. It cautioned that interim results are not necessarily indicative of full-year results.
- Risks include cash deposits exceeding FDIC insurance limits, interest-rate exposure on potential revolving borrowings, and refinancing risk. The company had no interest-rate derivatives; it also reported foreign-currency exposure, though transaction gains and losses were not material in the period.
- The company reported no material litigation or material changes to previously disclosed risk factors other than the deposit-insurance risk described in this filing. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether royalty growth and franchisee retail sales remain resilient, and whether new store growth continues.
- Whether SG&A growth moderates and margins stabilize.
- Cash, debt and covenant capacity after payment of the special dividend, including the cash balance remaining.
- The pace and financial effect of the equipment-leasing portfolio run-off.
- Exposure of cash held above FDIC insurance limits and the terms and availability of future refinancing.