Winmark Corp. 10-Q Summary: Quarter Ended March 26, 2011
Business Context and Reporting Period
This filing covers the quarterly period ended March 26, 2011. Winmark Corporation operates two primary segments: franchising (Plato's Closet, Play It Again Sports, Once Upon A Child, Music Go Round) and equipment leasing (Winmark Capital and Wirth Business Credit). As of the period end, the company operated 902 franchises and maintained a leasing portfolio of $30.4 million.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenue | $11.1 million | $9.8 million |
| Net Income | $3.0 million | $2.2 million |
| Diluted EPS | $0.58 | $0.42 |
| Operating Cash Flow | $7.7 million | $4.0 million |
| Cash and Equivalents | $2.4 million | $13.1 million |
| Line of Credit Outstanding | $3.5 million | $8.8 million (Q4 2010) |
| Net Investment in Leases | $30.4 million | $30.7 million (Q4 2010) |
Margins: Net income margin improved to 27.2% from 22.2% year-over-year. Operating income margin increased to 47.0% from 38.6%.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 12.8% to $11.1 million. Royalties rose 10.8% to $7.1 million, driven by higher franchisee sales and 30 additional Plato's Closet stores. Leasing income surged 28.1% to $3.2 million due to higher equipment sales and a larger middle-market portfolio.
- Expense Management: Selling, General, and Administrative (SG&A) expenses remained flat at $4.8 million. The provision for credit losses dropped significantly to $45,400 from $172,100, reflecting lower net write-offs and delinquencies.
- Interest Expense: Interest expense decreased to $31,100 from $288,200, primarily due to the redemption of Renewable Unsecured Subordinated Notes in July 2010 and lower corporate borrowings.
- Liquidity: Cash and cash equivalents declined to $2.4 million from $13.1 million in the prior year quarter, largely due to financing activities including stock repurchases and debt payments.
Outlook, Risks, and Unusual Items
- Capital Allocation: The company repurchased 72,483 shares of common stock for $2.5 million during the quarter. Approximately 522,883 shares remain available under the current repurchase plan.
- Investments: The company recorded a $77,000 loss from its equity investment in Tomsten, Inc. Additionally, a $2.0 million investment in BridgeFunds Limited is deemed impaired, though no charge was warranted as the present value of expected cash flows exceeds the carrying amount.
- Franchise Activity: The company renewed 24 of 24 franchise agreements available for renewal. However, 15 Wirth Business Credit territories were terminated during the quarter.
- Liquidity Position: The company maintains a $30.0 million line of credit with $26.5 million available. Management believes cash on hand, operating cash flow, and credit availability are adequate to fund operations through 2011.
- Risks: Key risks include the performance of franchisees, credit losses in the leasing portfolio, and interest rate fluctuations on the variable-rate line of credit.
Investor Verification Checklist
- Verify the sustainability of the 28.1% increase in leasing income given the reduction in the small-ticket leasing portfolio.
- Monitor the $2.0 million BridgeFunds investment for potential future impairment charges if cash flows do not materialize.
- Assess the impact of the 15 terminated Wirth Business Credit territories on future leasing revenue.
- Review the company's ability to maintain the current low provision for credit losses ($45,400) in a changing economic environment.
- Confirm the utilization of the $26.5 million remaining line of credit availability against future capital needs.