Winmark Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 25, 2021; unaudited. Winmark franchises five resale retail brands and operates a middle-market equipment leasing business. It had 1,269 franchised stores at period-end.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $20.2 million | $18.3 million | $57.8 million | $49.3 million |
| Operating income | $13.8 million | $12.5 million | $38.4 million | $29.3 million |
| Net income | $10.1 million | $9.4 million | $28.3 million | $21.7 million |
| Diluted EPS | $2.67 | $2.43 | $7.40 | $5.63 |
| Operating margin | 68.4% | 68.4% | 66.4% | 59.4% |
| Net margin | 50.0% | 51.2% | 49.0% | 44.1% |
- Q3 revenue rose about 10%; nine-month revenue rose about 17%. Royalties increased 15% in Q3 and 36% for the nine months, driven primarily by stronger franchisee retail sales; the prior-year period was affected by COVID-related closures and reduced traffic.
- Nine-month franchising revenue was $49.5 million versus $37.2 million, while leasing revenue fell to $8.4 million from $12.0 million. Franchising segment contribution increased to $33.6 million from $22.6 million; leasing contribution declined to $4.8 million from $6.7 million.
- For the nine months, SG&A increased 3.6% to $16.3 million, while interest expense declined to $0.9 million from $1.4 million. The effective tax rate increased to 24.4% from 22.1%.
Cash, liquidity, and capital
- Cash and cash equivalents were $37.6 million at September 25, 2021, compared with $6.7 million at December 26, 2020. Working capital was approximately $33.6 million, based on current assets of $44.4 million and current liabilities of $10.8 million.
- Nine-month operating cash flow was $35.0 million versus $31.8 million. Investing activities used $0.1 million; financing activities used $4.0 million. The cash increase reflected operating cash generation and $30.0 million of new note proceeds, offset in part by repurchases, dividends, and debt repayments.
- Notes payable had a $48.75 million aggregate principal balance, including $30.0 million of Series C notes issued in September at 3.18%. The balance sheet reports notes payable, net of issuance costs, of $48.7 million. The $25.0 million revolving credit facility had no borrowings outstanding; the company reported covenant compliance.
- Shareholders’ equity was a deficit of $12.8 million. Winmark repurchased 147,819 shares for $27.9 million and paid $4.2 million in dividends during the first nine months.
Material changes, outlook, and risks
- In May 2021, Winmark decided to stop soliciting new leasing customers and run off its leasing portfolio. Net investment in leases declined to $5.0 million from $13.3 million at year-end. Management expects leasing income net of leasing expense, lease-equipment purchases, and portfolio size to continue to decline during the run-off.
- After quarter-end, the board approved a $7.50-per-share special dividend, approximately $27.2 million, payable December 1, 2021 and expected to be funded from cash on hand.
- Management believed cash, business cash flows, and the credit facility would be adequate to fund planned operations through 2022. It cautioned that the pandemic, changing consumer behavior, store restrictions, and uncertain economic conditions could affect franchisees, customers, liquidity, and results; nine-month results are not necessarily indicative of full-year performance.
- The company reported no material litigation, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. It identified interest-rate and foreign-currency exposure; it had no interest-rate derivatives.
Important facts for investors to verify
- Whether franchisee sales and royalty growth are sustainable as pandemic-related comparisons normalize, and how store openings, closures, and renewals trend.
- The pace and cash-generation assumptions for the leasing portfolio run-off, including realization of equipment residual values and lease collections.
- The effect of the special dividend and continued repurchases on cash balances, debt capacity, and shareholder deficit.
- Debt covenant terms and refinancing or liquidity needs, particularly given debt secured by substantially all company assets and the planned cash distribution.