Winmark Corp. 10-Q Summary: Quarter Ended September 25, 2010
Business Context and Reporting Period
This filing covers the quarterly period ended September 25, 2010, and the nine-month period ended on the same date. Winmark Corporation operates two primary segments: franchising (brands include Play It Again Sports, Plato's Closet, Once Upon A Child, Music Go Round, and Wirth Business Credit) and equipment leasing (Winmark Capital Corporation and Wirth Business Credit). As of the reporting date, the company operated 908 franchises and maintained a leasing portfolio of approximately $32.4 million.
Key Financial Metrics
| Metric | Three Months Ended 9/25/10 | Nine Months Ended 9/25/10 |
|---|---|---|
| Total Revenue | $11.01 million | $30.73 million |
| Net Income | $2.69 million | $7.21 million |
| Earnings Per Share (Diluted) | $0.51 | $1.39 |
| Operating Cash Flow (9mo) | $7.77 million | |
| Cash and Equivalents (End of Period) | $2.17 million | |
| Debt Outstanding (Line of Credit) | $15.40 million | |
| Available Credit Capacity | $14.60 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 12.0% for the nine months ended September 25, 2010, compared to the prior year. Royalties grew 12.0% to $19.76 million, driven by higher franchisee sales and 30 additional Plato's Closet stores.
- Profitability Improvement: Net income for the nine-month period rose 64.3% to $7.21 million from $4.39 million in the prior year. Operating income increased to $13.21 million from $8.10 million.
- Reduced Credit Losses: The provision for credit losses dropped significantly to $142,400 for the nine months ended 2010, down from $1.88 million in 2009. This was due to lower net write-offs and delinquencies in the small-ticket financing business.
- Debt Restructuring: The company terminated its previous $40 million credit facility and entered a new $30 million line of credit. It used this facility to redeem all outstanding Renewable Unsecured Subordinated Notes ($21.2 million principal) in July 2010.
- Share Repurchases: The company repurchased 163,567 shares of common stock for $3.93 million during the nine-month period.
Outlook, Risks, and Management Commentary
Management attributes the improved results to increased royalty revenue, lower credit losses, and controlled selling, general, and administrative (SG&A) expenses, which decreased 2.0% year-over-year. The leasing segment turned profitable, generating $1.94 million in operating income for the nine-month period compared to a loss of $0.87 million in the prior year.
Liquidity: The company maintains a current ratio of 1.1 to 1.0. Management believes cash on hand, operating cash flow, and the $14.6 million remaining availability on the line of credit are sufficient to fund operations through 2011.
Risks and Contingencies:
- Equity Investments: The company recorded a loss of $322,400 from its investment in Tomsten, Inc. (parent of Archiver's). There is an unrealized loss of $156,900 on marketable securities, though management does not consider it other-than-temporarily impaired.
- Interest Rate Risk: The company has $15.4 million in short-term borrowings subject to variable rates. A 1% increase in rates would reduce annual pretax earnings by approximately $154,000.
- Franchise Renewals: Management monitors renewal rates closely; 43 of 46 agreements up for renewal were completed in the first nine months of 2010.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the new $30 million line of credit covenants regarding debt service coverage and tangible net worth.
- Leasing Portfolio Quality: Monitor the allowance for credit losses and delinquency rates to ensure the significant reduction in provisions is sustainable.
- Equity Investment Valuation: Review the financial performance of Tomsten, Inc. and the status of the $2.0 million investment in BridgeFunds Limited (maturity extended to June 30, 2011).
- Franchise Growth: Track the net addition of franchise stores and the renewal rate of existing 10-year agreements to assess future royalty revenue stability.
- Cash Position: Observe the trend in cash and cash equivalents, which decreased from $9.49 million at year-end 2009 to $2.17 million at the end of Q3 2010 due to debt redemption and stock buybacks.