Winmark Corp. 10-K Summary: Fiscal Year Ended December 25, 2004
Business Context and Reporting Period
Winmark Corporation is a franchisor of value-oriented retail store concepts (Play It Again Sports, Once Upon A Child, Plato's Closet, and Music Go Round) that buy, sell, trade, and consign used and new merchandise. The company also operates equipment leasing businesses through subsidiaries Winmark Capital Corporation and Winmark Business Solutions, Inc. This report covers the fiscal year ended December 25, 2004.
Key Financial Metrics
| Metric | 2004 | 2003 |
|---|---|---|
| Total Revenue | $27.2 million | $31.2 million |
| Net Income | $4.1 million | $4.0 million |
| Diluted EPS | $0.63 | $0.63 |
| Operating Cash Flow | $4.7 million | $5.2 million |
| Net Investment in Leasing | $1.7 million | $0 |
| Total Debt | $0 | $0 |
| Cash & Equivalents | $6.0 million | $4.2 million |
| Current Ratio | 3.68:1 | 2.82:1 |
Revenue Composition: Royalties accounted for 62.1% of total revenue ($16.9 million), while merchandise sales dropped to 32.1% ($8.7 million). Franchise fees contributed 3.6% ($0.98 million).
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 12.9% to $27.2 million, primarily driven by a 35% drop in merchandise sales. This was a strategic shift to have franchisees purchase directly from vendors rather than through Winmark's buying group.
- Profitability Growth: Despite lower revenue, Net Income increased 1.7% to $4.1 million due to a 5.7% reduction in Selling, General, and Administrative (SG&A) expenses.
- Store Count: Total franchised stores increased slightly to 789 (from 784), with net growth in Plato's Closet (+22) offset by net declines in Play It Again Sports (-15) and Once Upon A Child (-3).
- New Business Segment: The company launched equipment leasing operations in April 2004, resulting in a $1.7 million net investment in leasing operations, though revenue from this segment remains immaterial.
Outlook, Risks, and Management Commentary
Guidance and Outlook: Management expects the leasing business to become material in 2005. The company has secured a $15 million line of credit to fund leasing growth and general corporate purposes. Renewal rates for expiring franchise agreements were strong at 95% in 2004.
Risks and Contingencies:
- Franchise Renewals: A significant portion of Play It Again Sports and Once Upon A Child agreements expire in 2005-2007; failure to renew these would materially impact future royalties.
- Store Closures: Play It Again Sports has experienced net store closures for six consecutive years. Management aims to reverse this trend through enhanced support services.
- Minority Investments: The company holds significant illiquid investments in four private companies (Tomsten, eFrame, Commercial Credit Group, BridgeFunds). None recorded operating profits in 2004, and losses from equity investments totaled $195,000.
- Competition: Franchisees face intense competition from large retailers (e.g., Wal-Mart, Target) and online used goods markets.
Investor Verification Checklist
- Verify the sustainability of the 95% franchise renewal rate given the upcoming expiration of 27 Play It Again Sports and 16 Once Upon A Child agreements in 2005.
- Monitor the profitability timeline of the new equipment leasing segment, which currently consumes cash but is projected to be material in 2005.
- Assess the valuation and liquidity risk of the $10.7 million in long-term minority investments, particularly eFrame LLC which has a history of operating losses.
- Confirm the trend of Play It Again Sports store closures stabilizes or reverses as management claims.
- Review the utilization of the new $15 million line of credit and its impact on future leverage ratios.