Winmark Corporation — FY2015 Form 10-K
Business context and reporting period. The fiscal year ended December 26, 2015 (52 weeks). Winmark franchises five value-oriented resale retail brands and operates middle-market equipment leasing and small-ticket financing businesses. It had 1,150 franchised stores at year-end, up from 1,092; its net investment in leases was $39.0 million.
Financial performance and position
- Revenue: $69.45 million, up 13.5% from $61.18 million. Royalties were $41.91 million (+7.5%); leasing income was $21.57 million (+32.7%).
- Profit: Operating income was $37.09 million (+12.2%); net income was $21.80 million (+8.6%). Diluted EPS rose to $4.69 from $3.85, reflecting both higher earnings and fewer weighted-average shares.
- Margins: Operating margin was 53.4%, versus 54.0%; net margin was 31.4%, versus 32.8%. Leasing income less leasing expense increased to $15.8 million from $14.6 million.
- Cash flow: Operating activities generated $22.30 million, compared with $17.98 million. Investing activities provided $4.50 million, including $26.60 million of lease principal collections and $22.19 million of equipment purchases. Financing activities used $27.88 million.
- Liquidity and debt: Cash was $1.01 million, down from $2.09 million; working capital was $16.92 million. Total debt was $66.4 million, versus $18.5 million, and shareholders’ equity moved to a $30.67 million deficit from $21.61 million positive. The company reported $17.6 million available on its $60 million revolving line and compliance with debt covenants at year-end.
- Fourth quarter: Revenue was $16.95 million, operating income $9.69 million, net income $5.65 million, and diluted EPS $1.31. In Q4 2014, these were $16.18 million, $9.35 million, $5.61 million, and $1.09, respectively.
Material changes versus the prior year
- Royalties grew with additional Plato’s Closet and Once Upon A Child stores and higher franchisee retail sales. Total stores increased by 58 net; 73 opened and 15 closed. All 78 agreements eligible for renewal were renewed.
- Leasing income rose substantially, primarily due to a higher level of equipment sales to customers; leasing expense also increased sharply, from $1.63 million to $5.76 million. The leasing portfolio declined to $39.0 million from $44.0 million.
- In 2015, Winmark repurchased 881,518 shares for approximately $74.9 million, including a tender offer for 875,000 shares at $84.72 each. It funded the transaction partly with borrowing, including a new $25 million, 10-year note at 5.50%. The resulting leverage drove interest expense up to $1.80 million from $0.48 million.
- The 2015 quarterly dividends totaled $0.27 per share; the prior-year total of $5.23 included a $5.00 special dividend.
Outlook, risks, and notable items
- Management stated that cash on hand, franchising cash flows, lease discounting sources, and the revolving line were expected to fund planned operations, including leasing activity, through 2016. The filing provides no quantified earnings or revenue guidance.
- Key risks include franchise renewals and openings, reliable supply of used merchandise, competition, and credit losses in the leasing portfolio. Three customers represented approximately 48% of net investment in leases, creating concentration risk.
- The allowance for lease credit losses increased to $859,100 from $386,000, despite a negative provision for credit losses of $149,700 in 2015; the allowance reflects management estimates and is subject to uncertainty.
- The $42.4 million revolving-line balance bears variable rates; management estimated a 1 percentage-point rate increase would reduce annual pretax earnings by $424,000. Debt is secured by substantially all company assets and subject to financial covenants.
- No material litigation or off-balance-sheet arrangements were reported. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Track progress in opening the 88 signed retail franchise agreements not yet operating, and sustainability of franchisee sales and royalty growth.
- Review lease originations, portfolio quality, customer concentration, residual-value assumptions, and whether the $859,100 credit-loss allowance proves adequate.
- Assess debt repayment capacity, variable-rate exposure, covenant headroom, and the effect of the tender-offer-funded capital structure.
- Reconcile cash generation with lease equipment purchases, shareholder distributions, and future financing needs.
- Confirm any developments in franchise renewals, regulation, and the adoption of new accounting standards noted in the filing.