Winmark Corporation — Q2 2022 Form 10-Q
Business and period. Winmark franchises five resale retail brands and operates an equipment-leasing business. The unaudited quarter ended June 25, 2022; comparable periods ended June 26, 2021. At quarter-end, 1,293 franchised stores were operating. The company is winding down leasing and no longer solicits new leasing customers.
Financial performance
| Metric | Three months ended June 25, 2022 | Three months ended June 26, 2021 | Six months ended June 25, 2022 | Six months ended June 26, 2021 |
|---|---|---|---|---|
| Revenue | $19.1 million | $19.0 million | $39.1 million | $37.7 million |
| Operating income | $12.4 million | $12.0 million | $25.8 million | $24.6 million |
| Net income | $9.0 million | $8.9 million | $18.9 million | $18.2 million |
| Diluted EPS | $2.54 | $2.33 | $5.19 | $4.74 |
| Operating margin | 64.8% | 62.9% | 65.9% | 65.4% |
| Net margin | 47.3% | 46.9% | 48.3% | 48.4% |
Revenue mix and trends. Q2 royalties were $16.0 million, up 8.6%, reflecting higher franchisee retail sales and more stores. Leasing income fell to $1.2 million from $2.8 million as equipment sales and lease-portfolio interest income declined. Merchandise sales rose to $1.0 million from $0.7 million. For the first half, royalties increased 9.1% to $31.4 million, while leasing income declined to $4.1 million from $6.1 million. Total revenue was nearly flat year over year in Q2 (+0.2%) but rose 3.8% for the first half.
Q2 SG&A decreased 5.9% to $5.5 million; first-half SG&A increased 0.9% to $11.0 million. Interest expense rose to $0.7 million in Q2 and $1.2 million for the first half, primarily because of higher average borrowings. Effective tax rates were 22.4% for Q2 and 23.1% for the first half.
Cash, liquidity and debt
- First-half operating cash flow was $22.4 million, versus $23.1 million. Investing used $3.6 million, mainly for reacquired franchise rights; financing used $21.5 million.
- Cash, cash equivalents and restricted cash totaled $8.8 million at June 25, 2022, compared with $7.2 million at June 26, 2021. Cash declined $2.7 million from the beginning of fiscal 2022.
- At quarter-end, Winmark had $30.0 million of delayed-draw term loans and $45.6 million principal outstanding under its Prudential note agreement; no revolving borrowings were outstanding, with $20.0 million of revolving capacity available. The $30.0 million term loans bore rates of 4.60%–4.75% and mature in 2029. The filing reports covenant compliance.
- Cash and debt context: current assets were $14.3 million and current liabilities $12.3 million. Shareholders’ deficit was $68.8 million, versus $39.1 million at year-end, reflecting substantial repurchases and dividends.
- Management said cash, operating cash generation, the credit line and shelf facility are expected to fund planned operations through 2023. The Prudential shelf agreement permits potential note issuance subject to its terms; no notes had been issued under it at quarter-end.
Material developments, outlook and risks
- Winmark spent $3.54 million to reacquire franchise rights for 11 Play It Again Sports stores; those stores signed new 10-year franchise agreements. First-half franchising activity included 29 openings and seven closures, and all 87 agreements available for renewal were renewed.
- First-half share repurchases totaled $47.8 million for 220,280 shares; dividends paid were $4.1 million. The company had authorization to repurchase 84,485 additional shares at quarter-end. Quarterly dividends were $0.45 and $0.70 per share.
- Management expects leasing revenue, net leasing income and the portfolio to continue declining as the leasing business runs off. Franchise growth depends on franchisee performance, new store openings and control of SG&A.
- Management cited continued uncertainty from COVID-19 and cautioned that its duration and financial effects cannot be estimated with certainty. Interest-rate exposure includes potential floating-rate revolver borrowings and refinancing risk; no interest-rate derivatives were in place. Management reported no material changes to previously disclosed risk factors, no material litigation, and effective disclosure controls.
Important facts for investors to verify
- Whether franchisee sales, royalty growth, renewals and openings remain strong, and whether franchisee economics support further expansion.
- The pace and profitability of the leasing-portfolio runoff, including equipment residual values and customer collections.
- Debt-service capacity and covenant headroom after significant repurchases and dividends; confirm interest-rate terms on future draws and refinancing needs.
- Whether management’s liquidity outlook through 2023 remains supportable under weaker operating conditions or continued COVID-19 disruption.
- The filing reports $3.54 million paid for reacquired rights and $3.525 million of intangible assets recognized; investors may wish to review the accounting and expected amortization.