Winmark Corporation 10-Q Summary
Business Context and Reporting Period
Winmark Corporation (Winmark) operates a franchising business for value-oriented retail concepts (Play It Again Sports, Once Upon A Child, Plato's Closet, Music Go Round) and an equipment leasing business. This report covers the quarterly period ended March 26, 2005. As of the period end, the company operated 791 franchised stores.
Key Financial Metrics
| Metric | Q1 2005 | Q1 2004 |
|---|---|---|
| Total Revenue | $7,144,700 | $7,563,700 |
| Net Income | $699,900 | $1,360,300 |
| Earnings Per Share (Diluted) | $0.11 | $0.21 |
| Operating Cash Flow | $1,411,600 | $1,810,600 |
| Cash and Equivalents | $6,641,300 | $5,823,400 |
| Current Ratio | 3.3:1 | 3.7:1 |
| Long-Term Debt | $0 | $0 |
Segment Performance: Franchising revenue was $7.08 million with a contribution of $2.76 million. The Leasing segment generated $60,900 in revenue but reported a loss of $454,400 due to startup costs.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 5.5% year-over-year. Royalties fell 2.5% ($115,500) primarily due to 12 fewer Play It Again Sports stores, partially offset by growth in Plato's Closet. Merchandise sales dropped 14.1% due to a strategic shift toward franchisees buying directly from vendors and the sale of company-owned stores in the prior year.
- Profitability Compression: Net income decreased 48.5% to $699,900. Operating income fell 43.7% to $1.18 million.
- Expense Increases: Selling, General, and Administrative (SG&A) expenses rose 21.9% to $4.05 million. Increases were driven by stock-based compensation ($76,000 increase), salaries, advertising, and $515,300 in costs related to the new leasing operations.
- Investment Losses: Loss from equity investments increased to $94,100, reflecting losses from eFrame, LLC and Commercial Credit Group, Inc.
Outlook, Risks, and Management Commentary
- Leasing Growth: Management expects leasing activities to become material to financial results for the remainder of 2005. The company has a $15 million line of credit available, of which up to $10 million can be used for leasing, though no funds have been drawn yet.
- Franchise Renewals: Renewal activity is a key focus; 13 of 18 available franchise agreements were renewed in Q1 2005.
- Liquidity: The company maintains strong liquidity with $7.8 million in cash and current marketable securities. Management believes cash flow and existing credit facilities are adequate for 2005 operations and investment commitments.
- Risks: Risks include the performance of franchisees affecting royalty estimates, potential impairment of long-term investments (Tomsten, eFrame, Commercial Credit Group, BridgeFunds), and the success of the new leasing segment.
Investor Verification Checklist
- Verify the trajectory of Play It Again Sports store counts and royalty recovery.
- Monitor the break-even timeline for the new leasing segment, which currently carries significant startup costs.
- Review the valuation and performance of long-term equity investments (Tomsten, eFrame, Commercial Credit Group, BridgeFunds) for potential impairment risks.
- Confirm the impact of the strategic shift in merchandise sales (franchisee direct purchasing) on future revenue stability.
- Track the utilization of the $15 million credit line for leasing expansion.