Winmark Corporation — FY2023 Form 10-K
Business context and reporting period. Winmark is a franchisor of five resale brands: Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round. The fiscal year ended December 30, 2023; it was a 52-week year, compared with 53 weeks in FY2022. The filing reports annual results, not standalone fourth-quarter figures. At year-end, 1,319 stores operated in the U.S. and Canada, all owned by franchisees. Winmark also operates a middle-market equipment-leasing business that it is winding down.
Financial performance and liquidity
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $83.2 million | $81.4 million | +2.3% |
| Operating income | $53.3 million | $53.6 million | -0.6% |
| Operating margin | 64.0% | 65.9% | -1.9 percentage points |
| Income before taxes | $51.4 million | $50.8 million | +1.1% |
| Net income | $40.2 million | $39.4 million | +1.9% |
| Net margin | 48.3% | 48.4% | -0.1 percentage points |
| Diluted EPS | $11.04 | $10.97 | +0.6% |
- Revenue mix: Royalties were $70.2 million, up 4.6%, driven primarily by higher franchisee retail sales and more stores. Franchise royalties and fees together contributed $71.7 million, or 86.2% of consolidated revenue. Leasing income fell 31.3% to $4.8 million; merchandise sales rose 21.4% to $4.8 million.
- Costs and margins: SG&A increased 8.4% to $25.1 million, attributed mainly to conference costs, advertising, outside services and amortization. Interest expense increased 6.0% to $3.1 million. The effective tax rate declined to 21.8% from 22.4%.
- Cash flow: Operating activities provided $44.0 million, versus $43.8 million. Investing activities used $0.4 million, versus $3.7 million. Financing activities used $43.9 million, including $43.7 million of dividends and $4.3 million of note payments, partly offset by $4.0 million from option exercises. Year-end cash, cash equivalents and restricted cash were $13.4 million.
- Debt and liquidity: Principal outstanding was approximately $69.2 million: $30.0 million in term loans and $39.2 million in notes. No revolving credit was drawn, leaving $20.0 million available; the company also had an unused private shelf facility. Debt is secured by substantially all assets and subject to financial covenants; Winmark reported compliance at year-end. Management said available cash, operating cash flows and credit facilities should fund planned operations through 2024.
- Capital returns: Winmark paid $43.7 million in dividends, including a $9.40-per-share special dividend totaling $32.9 million. It made no share repurchases in 2023; 78,600 shares remained authorized for repurchase. Shareholders’ equity was a deficit of $59.2 million at year-end.
Material changes and operating developments
- System-wide franchise sales, an estimate of franchise-location sales, rose to $1.589 billion from $1.534 billion. Store count increased from 1,295 to 1,319, reflecting 39 openings and 15 closures.
- Of 177 franchise agreements up for renewal, 176 were renewed (99%). Management reported renewal rates of 99%–100% over the prior three years.
- Winmark had 71 signed franchise agreements at year-end, the majority expected to open in 2024. It cited more than 2,800 available territories.
- The leasing portfolio continued its planned run-off: leasing income net of expense declined to $4.4 million from $6.0 million, and net investment in leases fell to $0.1 million from $0.3 million. Management expects leasing income and portfolio size to continue to decrease.
- FY2022 included one additional week, affecting year-over-year comparability. Canadian franchise revenue was approximately $6.8 million in 2023, versus $6.4 million.
Outlook, risks and other items
- Management’s stated priorities include supporting franchisees, opening new locations and controlling SG&A. The filing does not provide quantified earnings or revenue guidance.
- Key risks include franchise renewals and openings, franchisee access to financing, reliable supply of used merchandise, competition from retailers and online marketplaces, and the ability to collect franchisee receivables.
- Winmark disclosed exposure to deposits above FDIC insurance limits, secured debt and covenant requirements, and potential difficulty refinancing or accessing credit. A 10% currency-rate move would affect annual pretax earnings by approximately $670,000, based on disclosed foreign-currency exposure.
- Cybersecurity threats could disrupt operations or expose confidential information; the company reported no cybersecurity incidents that had materially affected it to date. No material litigation was reported. The auditor issued unqualified opinions on the financial statements and internal controls and reported no critical audit matters.
- Other notable items include the special dividend and the leasing run-off. The filing states that no material commitments beyond debt and headquarters lease obligations were outstanding. Headquarters lease payments average approximately $840,500 annually over the remaining term through 2029.
Most important facts for investors to verify
- Whether franchisee sales, store openings and renewals support continued royalty growth, particularly as 146 agreements are scheduled to expire in 2024.
- Whether SG&A growth moderates and operating margins stabilize after declining in FY2023.
- Debt maturities and repayment capacity, especially the $30.0 million note maturity in 2028 and $30.0 million term loan maturity in 2029; confirm covenant headroom and refinancing assumptions.
- The sustainability of cash generation and dividends after the $32.9 million special dividend; dividends are discretionary.
- Progress and remaining financial effects of the leasing portfolio run-off, and the timing and economics of the 71 signed but unopened franchises.
- Confirm reported cash amounts: the balance sheet shows $13.362 million of cash and cash equivalents plus $25,000 restricted cash, while the cash-flow statement reports $13.387 million combined.