WINMARK CORP annual report, FY2011

Abrir documento

Winmark Corporation — FY2011 Form 10-K

Business context and reporting period. Winmark franchises four value-focused resale retail brands—Plato’s Closet, Play It Again Sports, Once Upon A Child and Music Go Round—and operates middle-market equipment leasing and small-ticket financing businesses. Fiscal 2011 ended December 31, 2011 and comprised 53 weeks; fiscal 2010 comprised 52 weeks. The financial statements were audited, with an unqualified audit opinion.

Financial performance

  • Revenue: $51.3 million, up 24.6% from $41.2 million. Royalties were $30.4 million (+14.6%); leasing income was $16.4 million (+65.4%).
  • Profit and margins: Operating income was $24.8 million (+34.0%), a 48.4% operating margin versus 45.0%. Net income was $14.1 million (+36.5%), a 27.5% net margin versus 25.1%. Diluted EPS was $2.69 versus $1.98.
  • Fourth quarter: Revenue was $13.2 million, operating income $6.9 million, net income $4.2 million and diluted EPS $0.80. The comparable 2010 quarter reported $10.5 million, $5.3 million, $3.1 million and $0.60, respectively.
  • Segment results: Franchising revenue was $34.9 million and segment contribution $18.4 million; leasing revenue was $16.4 million and contribution $6.5 million. Leasing contribution more than doubled from $3.1 million in 2010.
  • Cash flow and liquidity: Operating cash flow was $20.6 million versus $12.4 million. Cash and cash equivalents were $9.0 million at year-end, compared with $2.3 million; working capital was $15.9 million and the current ratio was 3.0, versus $3.6 million and 1.2.
  • Debt and capital allocation: No line-of-credit borrowings were outstanding at year-end, versus $8.8 million in 2010. Winmark repurchased 99,494 shares for $3.5 million and paid $0.5 million in regular dividends during 2011.
  • Leasing portfolio and credit: Net investment in leases was $29.8 million, down from $30.7 million. The credit-loss provision was a $43,400 credit versus $189,000 expense; net write-offs were $60,700 versus $620,600.

Material changes and unusual items

  • Royalty growth reflected stronger sales at Plato’s Closet and Once Upon A Child, additional Plato’s Closet stores, and the extra week in fiscal 2011. The system had 930 retail franchises at year-end, up from 903; 43 opened and 16 closed. All 80 agreements eligible for renewal were renewed.
  • Leasing income and expense rose substantially, primarily reflecting a higher level of equipment sales to customers. Winmark purchased $20.4 million of equipment for lease customers, compared with $15.3 million in 2010.
  • The company recorded an $883,100 impairment of its BridgeFunds notes and a $515,800 equity-method loss from Tomsten (Archiver’s). It stopped accruing interest on BridgeFunds and had received no principal payments by year-end.
  • After year-end, Winmark paid a $5.00-per-share special dividend on March 1, 2012, totaling $25.4 million. It was funded with cash and $12.8 million of net line-of-credit borrowings. The credit facility was amended to increase commitments from $30 million to $35 million and extend maturity to February 29, 2016.

Outlook, risks and contingencies

Management stated that cash on hand, franchising cash generation, lease-discounting sources and the credit facility should be adequate to fund planned operations, including leasing activity, through 2012. The filing does not provide specific earnings or revenue guidance.

  • Key risks include franchisee renewal and opening activity, franchisees’ access to financing, and reliable supplies of quality used merchandise. Management identified 44 signed retail franchise agreements expected to open in 2012.
  • Leasing results are exposed to customer defaults, credit quality, residual-value estimates, economic conditions and competition from larger, potentially lower-cost lenders. One leasing customer represented approximately 12% of total assets at year-end.
  • Tomsten has a history of losses; Winmark’s 22% investment had a $2.5 million carrying value. BridgeFunds’ $1.3 million net carrying value depended on collections from a run-off portfolio, with repayment uncertain.
  • The $35 million credit facility is secured by substantially all company assets and contains financial covenants. Winmark reported covenant compliance at December 31, 2011; the special dividend required lender consent and covenant-calculation amendments.
  • No material litigation was reported. The company disclosed ordinary-course legal claims and $4.1 million of minimum operating-lease commitments.

Important facts for investors to verify

  • Whether franchise openings and renewals sustain royalty growth, and how the 44 expected 2012 openings progress.
  • Whether leasing income and portfolio performance remain strong, including delinquencies, write-offs, customer concentration and the adequacy of the credit-loss allowance.
  • Actual recovery from BridgeFunds and future funding needs or impairment risk at Tomsten.
  • The company’s post-dividend cash, borrowing levels, covenant headroom and capacity to fund lease originations.
  • The comparability of reported growth given the extra fiscal week in 2011 and the effect of the special dividend on subsequent financial results.