Winmark Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter report. Fiscal 2022 had 53 weeks; fiscal 2021 had 52 weeks. Comparisons below are year over year unless noted.
Business context
Winmark is primarily a franchisor of five resale brands: Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round. All 1,295 stores operating at year-end were franchisee-owned; 142 were in Canada. The company also sells certain technology and merchandise to franchisees and operates an equipment-leasing business that it is winding down.
Franchise system-wide sales rose to $1.534 billion from $1.407 billion. Winmark’s royalties and franchise fees were $68.7 million, or 84.4% of consolidated revenue. The company reported 42 openings and 18 closures, and renewed all 144 agreements due for renewal. It had 57 signed agreements awaiting store openings, most expected to open in 2023.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $81.4 million | $78.2 million | +4.1% |
| Operating income | $53.6 million | $51.3 million | +4.4% |
| Operating margin | 65.9% | 65.6% | +0.3 percentage points |
| Net income | $39.4 million | $39.9 million | -1.2% |
| Net margin | 48.4% | 51.0% | -2.6 percentage points |
| Diluted EPS | $10.97 | $10.48 | +4.7% |
| Operating cash flow | $43.8 million | $48.3 million | Down $4.6 million |
Royalties increased 10.5% to $67.1 million, reflecting higher franchisee sales, more stores and the extra fiscal week. Leasing income fell 37.8% to $6.9 million as the portfolio ran off. Selling, general and administrative expense rose 3.9% to $23.2 million. Interest expense nearly doubled to $2.9 million, primarily due to higher average borrowings; the effective tax rate rose to 22.4% from 19.9%.
Cash, liquidity and debt
- Cash, cash equivalents and restricted cash totaled $13.7 million at year-end, versus $11.4 million a year earlier. Operating activities provided $43.8 million; investing activities used $3.7 million, including $3.54 million to reacquire franchise rights; financing activities used $37.9 million.
- Current assets were $18.1 million and current liabilities were $10.6 million, a balance-sheet current ratio of approximately 1.7x.
- Debt principal comprised $43.4 million of notes payable and $30.0 million of term loans, or $73.4 million in total before cash. No revolving credit was drawn; $20.0 million was available under the revolving facility. The company also had an unused Prudential shelf facility, subject to its terms.
- Debt facilities are secured by substantially all company assets and include financial covenants. Winmark reported covenant compliance at December 31, 2022. Management said available cash, operating cash generation, the credit line and shelf agreement were expected to fund planned operations through 2023.
- Shareholders’ deficit was $61.6 million, following substantial share repurchases and dividends. In 2022, the company repurchased 226,165 shares for $49.1 million and paid $19.3 million in dividends, including a $3.00-per-share special dividend.
Material changes, outlook and risks
- Franchising segment revenue increased to $74.5 million from $67.1 million, and segment contribution rose to $49.0 million from $44.8 million. Leasing segment revenue declined to $6.9 million from $11.1 million and contribution fell to $4.6 million from $6.5 million.
- Winmark ceased soliciting new middle-market leasing customers in 2021 and is pursuing an orderly run-off. Net investment in leases fell to $0.35 million from $3.12 million; management expects leasing income and portfolio size to continue declining.
- Management’s stated near-term funding outlook was through 2023; the filing does not provide specific revenue, earnings or store-opening guidance beyond the signed-franchise pipeline.
- Key risks include franchisee performance and renewal rates, dependence on new franchise openings, access to used merchandise, intense retail and online competition, franchisee receivable collections, debt service and covenant compliance, interest and foreign-exchange exposure, and cybersecurity. The filing notes that 180 franchise agreements were due to expire in 2023 and 148 in 2024.
- The filing reports no material litigation and no impairment of goodwill or intangible assets in 2022. It discloses $1.05 million of unrecognized tax benefits, including interest and penalties. The independent auditor gave an unqualified opinion on the financial statements and reported no critical audit matters; management concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether franchise system sales, royalty growth and the 57 signed-but-unopened agreements translate into sustained openings and royalties.
- Renewal performance as the 2023–2025 franchise agreements expire, and whether franchisee sales remain resilient amid competition and changing consumer conditions.
- Debt repayment and refinancing capacity, covenant headroom, borrowing costs and continued access to revolving and shelf financing.
- The pace and earnings contribution of the leasing portfolio run-off, and whether repurchases and dividends remain supportable by operating cash flow.
- The accounting and future amortization of the $3.54 million reacquired franchise rights, and developments in uncertain tax positions.