Winmark Corp. Q1 2010 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 27, 2010. Winmark Corporation operates two primary segments: Franchising (Play It Again Sports, Plato's Closet, Once Upon A Child, Music Go Round) and Leasing (Wirth Business Credit, Winmark Capital). As of the period end, the company operated 904 franchises and maintained a leasing portfolio of $34.6 million.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenue | $9.84 million | $9.25 million |
| Net Income | $2.18 million | $1.41 million |
| Earnings Per Share (Diluted) | $0.42 | $0.26 |
| Operating Cash Flow | $3.96 million | $2.81 million |
| Cash and Equivalents | $13.11 million | $5.01 million |
| Current Ratio | 1.7:1 | 1.4:1 |
| Debt Outstanding (Credit Facility) | $8.3 million | N/A |
| Debt Outstanding (Subordinated Notes) | $20.5 million | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 6.4% year-over-year, driven primarily by a 13.0% increase in royalties ($6.36 million vs. $5.63 million) and a 49.0% increase in franchise fees.
- Profitability: Net income rose 54.3% to $2.18 million. Operating income increased to $3.80 million from $2.67 million.
- Leasing Segment: Leasing income decreased 6.5% to $2.52 million due to a smaller portfolio ($34.6 million vs. $37.0 million prior year-end). However, the provision for credit losses dropped significantly to $172,100 from $419,700, improving segment contribution.
- Merchandise Sales: Sales to franchisees declined 20.9% to $494,700, attributed to a strategic shift encouraging franchisees to buy directly from vendors and fewer Play It Again Sports stores open compared to the prior year.
- Liquidity: Cash and cash equivalents increased by $3.62 million, bolstered by strong operating cash flows and net cash provided by investing activities ($1.76 million).
Outlook, Risks, and Management Commentary
- Capital Resources: Management believes cash on hand, operating cash flow, and available credit ($31.7 million remaining on a $40 million facility) are adequate to fund 2010 operations and leasing activities.
- Stock Repurchases: The company repurchased 30,576 shares for $658,000 during the quarter. A subsequent event noted an additional repurchase of 25,000 shares on April 2, 2010. Approximately 230,380 shares remain available under the current plan.
- Franchise Activity: The company opened 10 new franchises and closed 4, with a high renewal rate (26 of 27 agreements renewed).
- Risks: The filing references standard risk factors from the 2009 10-K, including economic conditions affecting leasing demand and franchisee performance. There are no material legal proceedings.
- Investments: The company holds illiquid investments of $4.2 million in Tomsten, Inc. and BridgeFunds Limited. No payments were received on BridgeFunds notes during the quarter.
Investor Verification Checklist
- Credit Quality: Verify the sustainability of the reduced provision for credit losses ($172k vs $420k) given the economic environment.
- Leasing Portfolio: Confirm the trend of the declining lease portfolio ($34.6M) and its impact on future leasing income.
- Franchisee Sales: Assess the long-term impact of the strategic shift reducing direct merchandise sales to franchisees.
- Debt Covenants: Review compliance with the Credit Facility covenants (debt service coverage, tangible net worth) as noted in the filing.
- Illiquid Assets: Monitor the valuation and liquidity of the $4.2 million investment in private companies (Tomsten and BridgeFunds).