Winmark Corp. 10-Q Summary: Quarter Ended September 27, 2008
Business Context and Reporting Period
Winmark Corporation (Winmark) operates two primary segments: franchising (brands include Play It Again Sports, Once Upon A Child, Plato's Closet, Music Go Round) and equipment leasing (Winmark Capital and Wirth Business Credit). This report covers the quarter and nine months ended September 27, 2008. The company is a smaller reporting company.
Key Financial Metrics
| Metric | 9 Months Ended 9/27/08 | 9 Months Ended 9/29/07 | 3 Months Ended 9/27/08 | 3 Months Ended 9/29/07 |
|---|---|---|---|---|
| Total Revenue | $26.72 million | $23.14 million | $9.13 million | $7.95 million |
| Net Income | $3.22 million | $2.19 million | $1.35 million | $1.13 million |
| Diluted EPS | $0.58 | $0.39 | $0.24 | $0.20 |
| Operating Cash Flow | $6.40 million | $4.01 million | N/A | N/A |
| Cash & Equivalents | $2.90 million | $0.81 million (end of period) | $2.90 million | $0.81 million |
| Debt (Line of Credit) | $14.02 million | $16.24 million | $14.02 million | $16.24 million |
| Debt (Subordinated Notes) | $20.92 million | $21.02 million | $20.92 million | $21.02 million |
| Lease Portfolio | $45.79 million | $33.19 million | $45.79 million | $33.19 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 15.5% year-over-year for the nine-month period, driven primarily by a 101% increase in leasing income ($5.92M vs $2.94M) and a 7.7% increase in royalties.
- Profitability: Net income rose 46.8% for the nine-month period. Operating income increased to $6.44 million from $4.61 million.
- Expense Increases: Provision for credit losses in the leasing segment surged to $1.23 million (nine months) from $0.42 million, reflecting higher charge-offs. Selling, General, and Administrative (SG&A) expenses increased 4.7% due to stock option expenses and amortization of initial direct costs.
- Franchise Activity: The company opened 63 new franchise territories and closed 31 in the first nine months, resulting in a net increase of 32 locations. Total franchised stores reached 866.
- Investment Losses: Losses from equity investments (Tomsten, Inc.) were $0.28 million for the nine months, compared to $0.34 million in the prior year.
Guidance, Outlook, and Risks
- Liquidity: Management believes cash on hand, operating cash flow, and available credit ($41 million remaining on a $55 million facility) are sufficient to fund operations through 2009.
- Capital Structure: The company amended its revolving credit facility in June 2008, increasing the commitment to $55 million and extending the term to 2013. It also maintains a shelf registration for up to $50 million in renewable subordinated notes, with $25.5 million sold as of the reporting date.
- Real Estate: Winmark signed a new 10.5-year lease for its corporate headquarters in September 2008, with estimated total rental payments of $5.1 million over the term.
- Risks: Key risks include the concentration of leased assets (one customer represents ~13% of total assets), credit losses in the leasing portfolio, and the performance of franchisees which drives royalty revenue. The company notes that forward-looking statements are subject to risks detailed in its 10-K.
Investor Verification Checklist
- Leasing Credit Quality: Verify the trend in the provision for credit losses ($1.23M YTD) and the allowance for credit losses ($0.87M) relative to the growing lease portfolio ($45.8M).
- Franchisee Performance: Confirm the sustainability of royalty growth driven by Plato's Closet and Once Upon A Child, noting the decline in Play It Again Sports royalties.
- Debt Covenants: Review compliance with financial covenants (debt service coverage, tangible net worth) under the new $55M credit facility.
- Equity Investment Valuation: Assess the carrying value and impairment risk of the $7.2M investment in Tomsten, Inc., which continues to generate losses.
- Stock Repurchases: Note that the company has repurchased 31,370 shares YTD, with 153,384 shares remaining under the current authorization.