Winmark Corp. 10-Q Summary: Quarter Ended September 28, 2002
Business Context and Reporting Period
Winmark Corporation operates a franchise business model licensing retail brands including Play It Again Sports, Once Upon A Child, Music Go Round, and Plato's Closet. The company also sells inventory to franchisees and operates corporate retail stores. This report covers the quarterly period ended September 28, 2002, and the nine-month period ended on the same date.
Key Financial Metrics
| Metric | Three Months Ended 9/28/02 | Nine Months Ended 9/28/02 |
|---|---|---|
| Total Revenue | $8.2 million | $25.7 million |
| Net Income | $1.1 million | $2.9 million |
| Diluted EPS | $0.17 | $0.47 |
| Operating Cash Flow | N/A | $4.0 million |
| Cash & Short-Term Investments | $6.6 million | $6.6 million |
| Long-Term Debt | $0 | $0 |
| Current Ratio | 2.38:1 | 2.38:1 |
Net income margins were 12.9% for the quarter and 11.1% for the nine-month period. The company reported no outstanding long-term debt as of September 28, 2002.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 10.4% in the quarter and 6.5% year-to-date compared to 2001. This was driven primarily by a 32.6% drop in Play It Again Sports buying group revenue due to a strategic shift allowing franchisees to purchase directly from vendors and a reduction in store count.
- Store Count: Total franchised and corporate stores decreased from 841 to 836 over the nine-month period, with 37 openings and 42 closures.
- Profitability: Despite lower revenue, net income increased 9.7% year-to-date ($2.9M vs $2.6M). This was aided by a significant reduction in interest expense (from $988,800 to $40,600 year-to-date) due to debt repayment and the absence of a one-time gain on the sale of Computer Renaissance recorded in the prior year.
- Investment Activity: The company initiated a $6 million investment in Tomsten, Inc. (parent of "Archiver's" retail chain), paying the initial $2 million installment in July 2002.
Outlook, Risks, and Management Commentary
- Liquidity: Management states that cash flow from operations, existing cash/investments ($6.6M), and a $2.5 million available credit facility (Rush River Facility) are adequate to meet obligations, including future installments for the Archiver's investment.
- Strategic Shifts: The decline in merchandise sales is attributed to a deliberate strategy to reduce reliance on the central buying group, which has lowered the company's exposure to inventory risk but reduced revenue volume.
- Contingencies: The company remains a guarantor on leases for sold or closed stores, with contingent liability up to $51,100. Management believes reserves are adequate.
- Accounting Changes: The company adopted SFAS No. 142, ceasing goodwill amortization effective January 1, 2002. This had no material impact on the current period's results.
Investor Verification Checklist
- Verify the sustainability of the revenue decline in the Play It Again Sports buying group and the long-term impact of the strategic shift to direct vendor purchasing.
- Confirm the status and performance of the $6 million investment in Tomsten, Inc. ("Archiver's").
- Monitor the company's ability to maintain the $1.922 million shareholder equity covenant required by the Rush River credit facility.
- Review the trend in store closures versus openings to assess franchisee health and brand stability.
- Assess the impact of reduced interest expense on future earnings once the company potentially incurs new debt for expansion.