Winmark Corporation — Q3 2020 Form 10-Q
Business context and reporting period. The unaudited quarter ended September 26, 2020; year-to-date figures cover the first nine months and are compared with the corresponding 2019 periods. Winmark franchises five resale retail concepts and operates middle-market and small-ticket equipment leasing businesses. It reported 1,262 franchised stores and a $15.6 million net leasing portfolio at quarter-end.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $18.3 million | $19.7 million | $49.3 million | $55.4 million |
| Operating income | $12.5 million | $12.3 million | $29.3 million | $32.2 million |
| Net income | $9.4 million | $9.1 million | $21.7 million | $23.7 million |
| Diluted EPS | $2.43 | $2.24 | $5.63 | $5.76 |
| Operating margin | 68.4% | 62.4% | 59.4% | 58.1% |
| Net margin | 51.2% | 46.3% | 44.1% | 42.8% |
- Q3 revenue fell about 7%, while operating income and net income increased about 2% and 3%, respectively. Nine-month revenue declined about 11% and net income about 8%.
- Royalties were $14.2 million in Q3, up 2.9% year over year, but $33.2 million for the first nine months, down 13.2%. Leasing income was $2.7 million in Q3 and $12.0 million year to date, down from the prior-year periods.
- Nine-month operating cash flow was $31.8 million, versus $38.1 million; investing cash use was $3.2 million and financing cash use was $45.5 million. Cash and restricted cash totaled $8.3 million at quarter-end, compared with $25.2 million at December 28, 2019.
- At September 26, cash and cash equivalents were $8.27 million; current assets were $22.0 million and current liabilities $11.7 million. Notes payable had a $22.9 million carrying value; principal outstanding was $23.0 million. The company also reported $2.3 million of discounted lease rentals. No line-of-credit borrowings were outstanding; $25.0 million was available.
- Winmark repurchased 300,000 shares for approximately $49.0 million in a tender offer during Q1. Nine-month dividends paid were $2.0 million. The repurchase and dividends contributed to shareholders’ deficit of $8.8 million at quarter-end.
Material changes and management commentary
- COVID-19-related store closures and reduced customer traffic drove lower franchisee sales and nine-month royalty revenue. Q3 royalties improved, which management attributed to higher franchisee retail sales and additional stores.
- Leasing portfolio net investment fell to $15.6 million from $25.3 million at year-end 2019 and $30.0 million a year earlier. Equipment purchases for lease customers were $3.1 million year to date versus $7.9 million in 2019. Management said continued low originations and a smaller portfolio could weigh on future leasing-segment operating income.
- SG&A decreased 20% year to date, primarily from lower compensation-related costs and reduced conference and travel expenses. The nine-month credit-loss provision was $164,300, compared with $23,000 in 2019; management cited the estimated pandemic effect on leasing customers’ credit quality. The Q3 statement recorded a credit-loss benefit of $339,600.
- Franchising segment contribution was $22.6 million for nine months, down from $25.8 million; leasing segment contribution rose to $6.7 million from $6.3 million. The company renewed 66 of 67 franchise agreements available for renewal and opened 18 stores while 12 closed.
- The credit facility was amended in September: commitments fell from $40 million to $25 million, maturity extended to August 2024, and up to $25 million of additional Prudential term notes were permitted. Winmark reported compliance with financial covenants at quarter-end.
Outlook, risks, and unusual items
- Management said cash on hand, operating cash generation, lease discounting sources, and the available line of credit were expected to fund planned operations through 2021. This outlook is subject to uncertainty from COVID-19, and management said the pandemic’s ultimate financial impact could not be reasonably estimated.
- On October 14, 2020, the board approved a $3.00-per-share special dividend, estimated at approximately $11.2 million and expected to be funded with cash on hand, payable December 15, 2020 to holders of record November 11. Lenders consented and amended the fixed-charge covenant definition in connection with the dividend.
- Management warned that renewed store closures, reduced traffic, weaker consumer spending, and leasing-customer defaults could further affect results. The filing provides no specific full-year earnings or revenue guidance.
- The company deferred $4.4 million of federal and state income tax payments under the CARES Act in Q2 and paid them in Q3. No material litigation or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the special dividend was paid as planned and its effect on cash, debt capacity, and covenant compliance.
- Whether franchisee sales and royalty trends sustained the Q3 improvement amid pandemic-related operating restrictions.
- Lease originations, portfolio contraction, collections, and credit-loss trends, including the assumptions behind the allowance.
- Liquidity and debt-service capacity after the substantial tender-offer repurchase, dividends, and special dividend.
- The duration and severity of COVID-19 impacts; management stated that the effects and timing remained uncertain.