Winmark Corporation — Q1 2021 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 27, 2021, compared with the three months ended March 28, 2020. Winmark franchises five value-oriented retail brands and operates an equipment leasing business. It reported 1,264 franchised stores at quarter-end.
Financial performance
- Revenue: $18.66 million, up 0.3% from $18.60 million. Royalties rose 25.7% to $14.05 million; leasing income declined 44.9% to $3.24 million. Franchising revenue was $15.42 million versus $12.73 million, while leasing revenue was $3.24 million versus $5.87 million.
- Profit and margins: Operating income increased 25.3% to $12.66 million; net income increased 27.3% to $9.31 million. Operating margin was 67.8% versus 54.3%, and net margin was 49.9% versus 39.3%. Diluted EPS was $2.40 versus $1.87.
- Segment results: Franchising contribution increased to $10.72 million from $7.21 million. Leasing contribution decreased to $1.93 million from $2.89 million.
- Cash flow: Operating activities provided $13.59 million versus $14.36 million. Investing activities used $0.10 million versus $1.74 million; financing activities used $12.18 million versus $9.41 million. Cash, cash equivalents and restricted cash ended the quarter at $7.98 million, up $1.30 million during the quarter.
- Liquidity and debt: Cash and cash equivalents were $7.96 million; current assets were $19.19 million and current liabilities $13.63 million. The revolving facility had no borrowings and $25.0 million available. Principal outstanding on Series A and B notes was $12.8 million and $8.1 million, respectively. The company reported compliance with debt covenants. Discounted lease rentals were a further $1.34 million liability at quarter-end.
- Shareholder returns: The company repurchased 58,255 shares for $10.46 million and paid a $0.25-per-share quarterly dividend.
Changes, outlook and risks
- Royalty growth reflected higher franchisee retail sales and additional stores; the year-ago quarter had lower sales and traffic amid COVID-19 closures and restrictions. Royalties in Q1 2019 were $11.8 million, versus $11.2 million in Q1 2020.
- Leasing income fell largely because of lower equipment sales to customers and reduced interest income from a smaller portfolio. Net investment in leases declined to $10.9 million from $13.3 million at December 26, 2020 and $21.3 million a year earlier. Equipment purchases for lease customers were $0.1 million versus $1.7 million.
- SG&A decreased 11.2% to $5.10 million, primarily due to lower conference and travel costs. The credit-loss provision was a $48,700 benefit, compared with $615,400 expense in Q1 2020.
- All 29 franchise agreements available for renewal were renewed; two stores opened and two closed during the quarter.
- No formal full-year earnings guidance was provided. Management expected cash on hand, operating cash flows, lease discounting sources and the credit line to fund planned operations through 2021, while cautioning that COVID-19’s effects remained uncertain and results might not represent the full year.
- Risks include renewed store restrictions or changes in consumer behavior, dependence on franchisee sales and e-commerce execution, and continued weakness in leasing originations and portfolio size, which management said could affect long-term leasing-segment operating income. The company also cited uncertainty around future financing and debt repayment capacity. It reported no material litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether royalty growth persists as pandemic-related comparisons normalize, and how franchisee sales, traffic and online channels develop.
- Whether leasing originations and the lease portfolio stabilize or continue to contract, and the resulting impact on leasing income and segment contribution.
- Cash generation, planned capital allocation and debt service, including covenants, the undrawn credit facility and management’s 2021 liquidity assessment.
- Credit-loss assumptions and leased-equipment residual values, which rely in part on management estimates.
- The effect of substantial share repurchases and dividends on liquidity and shareholder equity.