Winmark Corporation — FY2013 Form 10-K
Business context and reporting period. Winmark franchises value-oriented resale and retail concepts and operates middle-market equipment leasing and small-ticket financing businesses. This summary covers the 52-week fiscal year ended December 28, 2013; comparisons are to FY2012 unless noted. At year-end, 1,005 franchised stores operated in the U.S. and Canada, and the leasing portfolio was $37.5 million.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $55.7 million | $51.9 million | +7.3% |
| Operating income | $29.8 million | $27.3 million | +9.1% |
| Operating margin | 53.5% | 52.6% | +0.9 percentage points |
| Net income | $18.2 million | $12.9 million | +41.2% |
| Diluted EPS | $3.48 | $2.47 | +40.9% |
| Cash from operations | $21.6 million | $18.2 million | +$3.5 million |
| Cash and cash equivalents at year-end | $10.6 million | $2.2 million | +$8.4 million |
| Working capital | $20.2 million | $(1.6) million | Improved |
| Total debt at year-end | None | $10.8 million | Repaid |
Royalties were $36.3 million, up 7.7%, and leasing income was $14.5 million, up 9.9%. Franchising generated $41.2 million of revenue and $21.9 million of segment contribution; leasing generated $14.5 million of revenue and $7.9 million of segment contribution. Net margin was 32.7%, compared with 24.9% in FY2012. The effective tax rate was 38.4%, versus 44.1%.
Investing activities used $4.0 million of cash, including $20.7 million of equipment purchases for lease customers and $17.8 million of principal collections on lease receivables. Financing activities used $9.2 million, including repayment of the remaining $10.8 million line-of-credit balance, $1.0 million of dividends, and $1.9 million of share repurchases. The company had a $35.0 million revolving credit facility available at year-end and was in covenant compliance.
Material changes and notable items
- Franchise royalties grew primarily from more Plato’s Closet and Once Upon A Child stores and higher franchisee sales. Stores increased from 968 to 1,005; 69 opened and 32 closed. Renewal was 96% of agreements due for renewal.
- Leasing portfolio net investment rose to $37.5 million from $36.2 million. Leasing income net of leasing expense increased to $12.9 million from $11.4 million; equipment purchases for lease customers declined from $23.8 million to $20.7 million.
- SG&A increased 9.5% to $22.2 million, chiefly due to compensation, benefits, and advertising and launch costs for Style Encore. The new concept had 38 awarded franchises and three open stores at year-end.
- FY2012 included $2.5 million of equity-investment losses and $1.3 million of impairment charges on notes; neither recurred in FY2013. The Tomsten investment had been written down to zero, and Tomsten filed for Chapter 11 in April 2013. The BridgeFunds notes also had a zero net carrying value, with no expected cash flows.
- After year-end, the company paid a $5.00-per-share special dividend on March 3, 2014, totaling $25.8 million. It was funded with cash and $13.0 million of net line-of-credit borrowings. The facility was amended to adjust covenant calculations, lower interest margins, and extend maturity to February 2018.
Outlook, risks and contingencies
Management cited franchise support and openings, lease originations and credit performance, and expense control as key drivers of future operating income. It expected available cash, franchising cash generation, lease discounting and the credit facility to fund planned operations, including leasing activity, through 2014. The filing provides no quantified earnings or revenue guidance.
Principal risks include franchise renewals and the ability of awarded franchisees to open; the early-stage Style Encore concept; availability of quality used merchandise; franchisee receivable collection; intense retail and financing competition; lease defaults, credit losses and the adequacy of the loss allowance; economic weakness; and credit-facility covenant and lender risks. At year-end, $416,400 of lease investment was on non-accrual, compared with $6,800 in FY2012; the allowance for credit losses was $822,700. The company noted that allowance estimates and lease residual values depend on judgment. It reported no material litigation, no material off-balance-sheet arrangements, and no other material outstanding commitments beyond disclosed operating leases. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How the $25.8 million post-year-end special dividend and $13.0 million of resulting borrowings affect liquidity, leverage, covenants and capacity for future lease originations.
- Whether franchise openings and renewals sustain royalty growth, particularly given 112 signed agreements expected to open in 2014 and 88 agreements scheduled to expire in 2014.
- Whether the rise in non-accrual lease investment signals deterioration in credit quality, and whether the $822,700 loss allowance remains adequate.
- Whether leasing portfolio growth and returns continue despite lower equipment purchases and changes in lease accounting classification.
- Whether Style Encore gains traction and its launch costs remain manageable; confirm separately the trajectory of Play It Again Sports, where 21 stores closed in FY2013.