Winmark Corp. 10-Q Summary: Quarter Ended September 27, 2003
Business Context and Reporting Period
Winmark Corporation operates a franchise business model licensing retail brands including Play It Again Sports, Once Upon A Child, Music Go Round, and Plato's Closet. The company also sells inventory to franchisees and operates corporate-owned retail stores. This report covers the quarterly period ended September 27, 2003, and the nine-month period ended on the same date.
Key Financial Metrics
| Metric | Three Months Ended 9/27/03 | Nine Months Ended 9/27/03 |
|---|---|---|
| Total Revenue | $7,987,800 | $23,782,500 |
| Net Income | $1,104,100 | $2,982,700 |
| Net Income Per Share (Diluted) | $0.17 | $0.48 |
| Operating Cash Flow (9mo) | $3,807,800 | |
| Cash and Cash Equivalents | $3,006,900 (as of 9/27/03) | |
| Long-Term Debt | $0 (No debt outstanding) | |
| Current Ratio | 2.41 to 1.0 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 2.4% in the quarter and 7.6% for the nine-month period compared to 2002. Royalties dropped 2.5% year-over-year for the nine months due to lower franchisee sales and a net reduction of 20 franchised stores.
- Merchandise Sales: Direct franchisee sales fell 17.4% for the nine months, driven by a strategic shift encouraging franchisees to purchase directly from vendors rather than through Winmark's buying group.
- Profitability: Despite revenue declines, Net Income increased 4.3% for the quarter and 4.3% for the nine months. Operating margins improved, with operating income rising to 22.4% of revenue in the quarter (from 20.9% in 2002).
- Equity Investment Loss: The company recorded a $64,100 loss from its equity investment in eFrame, LLC, which did not exist in the prior year.
- Share Repurchases: The company utilized $1.875 million in cash to repurchase 200,000 shares of common stock during the nine-month period.
Outlook, Risks, and Management Commentary
- Liquidity: Management believes cash generated from operations and existing investments ($5.2 million in cash and marketable securities) are adequate to meet current obligations. The company has no outstanding debt.
- Store Activity: Total store count decreased from 828 to 816 over the nine-month period. While 29 stores opened, 41 closed. Notable growth occurred in Plato's Closet (19 new franchises), offset by closures in Play It Again Sports and Music Go Round.
- Investments: The company holds a 20.3% stake in Tomsten, Inc. (Archiver's) and a 20% stake in eFrame, LLC. The eFrame investment is accounted for under the equity method and contributed to the current quarter's loss.
- Contingencies: The company remains a guarantor on leases for sold or closed stores, with contingent liability up to $25,500. Management believes reserves are adequate.
- Accounting Changes: The company adopted SFAS 148 regarding stock-based compensation disclosures. Pro forma net income would be lower if all stock options were expensed under the fair value method.
Investor Verification Checklist
- Verify the sustainability of the strategic shift reducing "Direct Franchisee Sales" revenue and its long-term impact on royalty growth.
- Confirm the performance and valuation of the $6 million investment in Tomsten, Inc. and the ongoing losses from eFrame, LLC.
- Monitor the net store closure rate, particularly in the Play It Again Sports brand, to assess franchisee health.
- Review the impact of stock-based compensation on future earnings, noting the difference between reported and pro forma net income.
- Assess the adequacy of reserves for the $25,500 contingent lease liabilities.