Winmark Corp. 10-Q Summary: Quarter Ended June 26, 2010
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Winmark Corporation for the three and six months ended June 26, 2010. Winmark 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 and Wirth Business Credit). As of the period end, the company operated 908 franchises and maintained a leasing portfolio of $33.4 million.
Key Financial Metrics
| Metric | Three Months Ended June 26, 2010 |
Six Months Ended June 26, 2010 |
|---|---|---|
| Total Revenue | $9.88 million | $19.72 million |
| Net Income | $2.34 million | $4.52 million |
| Earnings Per Share (Diluted) | $0.45 | $0.87 |
| Operating Cash Flow | N/A | $6.60 million |
| Cash and Equivalents | $10.64 million | $10.64 million |
| Total Debt (Line of Credit + Notes) | $25.91 million | $25.91 million |
| Current Ratio | 1.53 | 1.53 |
Note: Debt figures represent the sum of current and long-term line of credit ($7.31M) and renewable unsecured subordinated notes ($18.60M) as of June 26, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 11.8% year-over-year for the quarter and 9.0% for the six-month period. Royalties grew 13.6% (quarter) and 13.3% (six months), driven by higher franchisee sales and 33 additional Plato's Closet stores.
- Profitability Surge: Net income for the six months ended June 26, 2010, was $4.52 million, a 73.2% increase compared to $2.61 million in the prior year period. Operating income rose from $4.91 million to $8.00 million (six months).
- Credit Losses: A significant driver of profit improvement was the reduction in the provision for credit losses. The provision dropped from $1.02 million in the prior six-month period to just $11,900 in the current period due to lower write-offs and delinquencies in the leasing segment.
- Merchandise Sales: Direct franchisee merchandise sales decreased 19.9% year-over-year due to a strategic shift encouraging franchisees to purchase directly from vendors.
Outlook, Commentary, and Subsequent Events
Management indicated that earnings are heavily influenced by credit loss levels and royalty revenue. The company believes its cash on hand, operating cash flow, and credit facilities are adequate to fund operations through 2011.
Subsequent Events (Post-June 26, 2010):
- Debt Redemption: On June 29, 2010, the company announced the redemption of all outstanding Renewable Unsecured Subordinated Notes ($18.6 million) scheduled for July 30, 2010.
- Facility Restructuring: On July 13, 2010, the company terminated its $40.0 million credit facility with Bank of America and entered into a new four-year $30.0 million line of credit with The PrivateBank and Trust Company. The old facility was repaid using existing cash balances.
Investor Verification Checklist
- Debt Refinancing: Verify the terms and covenants of the new $30.0 million line of credit entered into in July 2010.
- Credit Quality: Monitor the sustainability of the low provision for credit losses ($11,900) compared to historical levels ($1.02M) to ensure the leasing portfolio remains healthy.
- Franchise Count: Confirm the net addition of franchise stores (24 opened, 30 closed in six months) and the impact of the 15 fewer Play It Again Sports stores on future royalty revenue.
- Stock Repurchases: Note that the company repurchased 163,567 shares for $3.93 million in the first six months of 2010, with only 97,389 shares remaining available under the current plan.