Winmark Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 26, 2020; comparisons are with fiscal 2019. This is an annual filing, not a standalone fourth-quarter report.
Business context
Winmark franchises five resale retail concepts—Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round—and operates a middle-market equipment leasing business. At year-end, it had 1,264 franchised stores and a $13.3 million net leasing portfolio. Franchise royalties are its largest revenue source.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $66.1 million | $73.3 million |
| Operating income | $40.2 million | $43.1 million |
| Net income | $29.8 million | $32.1 million |
| Diluted EPS | $7.72 | $7.84 |
| Operating margin | 60.8% | 58.8% |
| Net margin | 45.1% | 43.8% |
| Operating cash flow | $43.2 million | $50.6 million |
| Cash and restricted cash, year-end | $6.7 million | $25.2 million |
| Working capital | $6.9 million | $29.3 million |
- Revenue fell 9.9% and net income fell 7.2%. Royalties declined 10.0% to $46.3 million as franchisees faced temporary store closures and reduced traffic amid COVID-19.
- System-wide franchise sales fell to $1.075 billion from $1.203 billion. Play It Again Sports sales rose to $250.4 million; sales declined across the other four brands.
- SG&A decreased 17.6% to $21.2 million, primarily reflecting lower compensation and COVID-related travel and conference costs. This helped lift operating and net margins despite lower revenue.
- Leasing income declined to $14.5 million from $16.1 million; leasing expense rose to $2.6 million from $2.0 million. Leasing-segment operating income increased to $8.3 million from $8.0 million, mainly due to lower SG&A.
- Equipment purchases for lease customers were $4.1 million versus $9.0 million; the net leasing portfolio contracted to $13.3 million from $25.3 million. Management warned that continued portfolio declines could reduce long-term leasing income.
- Investing activities used $4.2 million. Financing activities used $57.6 million, including $49.0 million for a 300,000-share tender offer and $14.2 million in dividends, including a $3.00-per-share special dividend. These capital returns contributed to the decline in cash and year-end shareholders’ equity of negative $11.4 million.
Debt, outlook and risks
- Notes payable totaled $21.9 million at year-end, bearing rates of 5.10%–5.50%; no line-of-credit borrowings were outstanding, and $25.0 million was available. The company reported compliance with debt covenants. Notes and the credit facility are secured by substantially all assets.
- Management said cash on hand, franchise cash generation, discounted lease financing and the credit line should fund planned operations through 2021. This is an assessment, not quantified earnings guidance.
- Management reported 26 store openings and 18 closures in 2020; 98 of 99 agreements due for renewal were renewed. Thirty signed retail franchise agreements were outstanding, with the majority expected to open in 2021.
- In August 2020, Winmark stopped originating small-ticket financing through Wirth Business Credit and sold its remaining portfolio for approximately $0.7 million.
- Key risks include continuing pandemic effects on store operations and consumer demand, franchise renewals and openings, competition from online resale platforms, used-goods supply, and declining lease originations or customer credit quality. Leased assets with one customer represented approximately 18% of net investment in leases.
- The company reported no material litigation, effective disclosure controls and internal control over financial reporting, and an unqualified audit opinion. The auditor reported no critical audit matters.
Important facts for investors to verify
- Whether franchisee sales, royalty revenue and store openings recovered after pandemic-related closures and restrictions.
- Whether the leasing portfolio and equipment purchases stabilized, and how customer concentration and credit losses evolved.
- Whether cash generation can support debt service, planned operations, and any future dividends or repurchases following the substantial 2020 capital returns.
- Whether franchise renewal rates remain high as 116 agreements were scheduled to expire in 2021.