Winmark Corporation 10-Q Summary
Business Context and Reporting Period
Winmark Corporation is a franchise company operating retail brands including Play It Again Sports, Once Upon A Child, Music Go Round, and Plato's Closet. The company franchises these brands and sells inventory to franchisees through a buying group. This report covers the quarterly period ended March 29, 2003.
Key Financial Metrics
| Metric | Q1 2003 | Q1 2002 |
|---|---|---|
| Total Revenue | $8,380,200 | $9,211,200 |
| Net Income | $1,122,200 | $1,075,900 |
| Net Income Per Share (Basic) | $0.20 | $0.20 |
| Net Income Per Share (Diluted) | $0.18 | $0.17 |
| Operating Cash Flow | $1,503,900 | $1,532,600 |
| Cash and Cash Equivalents (End of Period) | $2,270,700 | $678,000 |
| Current Ratio | 2.2 to 1.0 | 2.2 to 1.0 |
| Long-Term Debt | $0 | $0 |
Margins: Net income margin improved to 13.4% in Q1 2003 from 11.7% in Q1 2002. Operating income margin increased to 21.5% from 19.0%.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 9.0% to $8.4 million. Merchandise sales dropped 14.2% due to a strategic shift encouraging franchisees to buy directly from vendors and a reduction of 27 Play It Again Sports stores. Royalties decreased 2.8% due to lower franchisee sales and 16 fewer open stores.
- Profitability Increase: Despite lower revenue, Net Income increased 4.3% to $1.12 million. This was driven by a 15.1% reduction in Cost of Merchandise Sold and an 8.6% decrease in Selling, General, and Administrative (SG&A) expenses.
- Expense Reductions: SG&A expenses declined primarily due to lower depreciation, timing of advertising costs, and reduced legal fees.
- Interest Income: Net interest income rose 74.5% to $69,800, attributed to larger interest-earning investment balances.
Guidance, Outlook, and Risks
Management Commentary: Management expects cash generated from operations and existing investments to be adequate to meet current obligations and operating needs. The company continues to invest in Tomsten, Inc. (parent of Archiver's), with a total commitment of $6 million; $4 million has been paid, with the final $2 million due August 1, 2003.
Capital Allocation: The company repurchased 200,000 shares of common stock for $1.875 million during the quarter. Authorization remains to repurchase an additional 230,272 shares.
Risks and Contingencies:
- Lease Guarantees: The company remains a guarantor on leases for sold or closed stores, with contingent liability up to $67,600 as of March 29, 2003.
- Market Risk: Approximately $1.8 million is invested in fixed income securities. A 1% change in interest rates could significantly impact the fair value of these investments.
- Accounting Changes: The company adopted SFAS No. 123 fair value method for stock-based compensation. Pro forma net income would have been $938,000 (vs. reported $1,122,200) if this method had been applied to all awards.
Investor Verification Checklist
- Verify the impact of the strategic shift in the Play It Again Sports buying group on long-term royalty revenue stability.
- Confirm the status and performance of the $6 million investment in Tomsten, Inc. (Archiver's).
- Review the remaining share repurchase authorization and its potential impact on earnings per share.
- Assess the adequacy of reserves for the $67,600 in contingent lease liabilities.
- Monitor the effect of SFAS 123 adoption on future reported net income and EPS.