Winmark Corporation — Q2 2023 Form 10-Q
Business and period: The unaudited report covers the quarter and six months ended July 1, 2023, compared with periods ended June 25, 2022. Winmark franchises Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round; it also operates a middle-market equipment-leasing business that is being run off. The company reported 1,303 franchised stores at July 1, up from 1,295 at year-end 2022.
Financial results
| Metric | Three months ended July 1, 2023 | Three months ended June 25, 2022 | Six months ended July 1, 2023 | Six months ended June 25, 2022 |
|---|---|---|---|---|
| Revenue | $20.36 million | $19.07 million | $40.89 million | $39.12 million |
| Operating income | $13.25 million | $12.36 million | $25.64 million | $25.79 million |
| Net income | $10.37 million | $9.03 million | $19.31 million | $18.88 million |
| Diluted EPS | $2.85 | $2.54 | $5.34 | $5.19 |
| Operating margin | 65.1% | 64.8% | 62.7% | 65.9% |
| Net margin | 50.9% | 47.3% | 47.2% | 48.3% |
- Revenue mix and changes: Second-quarter revenue grew about 6.8%; first-half revenue grew about 4.5%. First-half royalties rose 7.9% to $33.85 million, primarily from higher franchisee retail sales and additional stores. Leasing income fell to $2.66 million from $4.08 million, consistent with the portfolio run-off. Merchandise sales increased to $2.60 million from $1.94 million.
- Profit and costs: Second-quarter net income increased about 14.9%; first-half net income increased about 2.3%, while first-half operating income declined about 0.6%. First-half SG&A rose 13.1% to $12.45 million, reflecting conference, advertising, outside-services and amortization costs. First-half interest expense increased to $1.58 million from $1.23 million, primarily due to higher average borrowings.
- Cash flow and liquidity: First-half operating cash flow was $23.15 million, versus $22.37 million. Investing used $0.10 million; financing used $4.36 million. Cash, cash equivalents and restricted cash totaled $32.38 million at July 1, compared with $8.75 million at June 25, 2022.
- Debt and balance sheet: Debt principal outstanding was approximately $71.3 million: $30.0 million of delayed-draw term loans and $41.3 million under Prudential notes. There were no revolving borrowings and $20.0 million of revolving capacity remained available. The notes’ carrying values are reduced by unamortized issuance costs. The company reported $43.61 million of shareholders’ deficit. It was in compliance with debt covenants. Scheduled note principal amortization includes $11.3 million through 2027, with $30.0 million due in 2028; the term loan matures in 2029.
Management commentary, outlook and risks
- Management said all 73 franchise agreements available for renewal in the first half were renewed. It identifies franchisee support and sales, new store openings, and control of SG&A as key to operating-income growth.
- Management expects leasing income net of leasing expense to continue declining as the portfolio runs off. It provided no specific earnings or revenue guidance, but believes cash, operating cash generation, the credit line and the shelf agreement will be adequate to fund planned operations through 2024.
- Cash dividends paid in the first half totaled $5.21 million. No shares were repurchased; authorization remained for 78,600 shares. The quarterly dividend increased from $0.70 per share in the first quarter to $0.80 in the second quarter.
- Key disclosed risks include debt-service and refinancing needs, access to credit markets, interest-rate exposure, and deposits at financial institutions potentially exceeding FDIC insurance limits. The company had no material litigation reported. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether franchisee retail-sales trends and store growth continue to support royalty growth, and whether SG&A growth moderates.
- The pace and profit contribution of the leasing run-off, given its declining revenue and management’s expectation of further declines.
- Debt amortization, interest costs, covenant headroom and the availability and terms of refinancing; the company’s liquidity outlook depends partly on future operating cash flow.
- The sustainability of dividends and the significance of the reported shareholders’ deficit relative to cash generation and debt obligations.
- Cash balances held above FDIC insurance limits and any resulting counterparty concentration exposure.