Winmark Corp. 10-Q Summary: Period Ended June 28, 2003
Business Context and Reporting Period
Winmark Corporation (Winmark) operates a franchise system for retail stores that buy, sell, trade, and consign merchandise under brands including Play It Again Sports, Once Upon A Child, Plato's Closet, and Music Go Round. This Form 10-Q covers the quarterly period ended June 28, 2003, and the six-month period ended on the same date. As of August 8, 2003, there were 5,616,596 shares of common stock outstanding.
Key Financial Metrics
| Metric | Three Months Ended June 28, 2003 | Six Months Ended June 28, 2003 |
|---|---|---|
| Total Revenue | $7,414,500 | $15,794,700 |
| Net Income | $756,400 | $1,878,600 |
| Diluted EPS | $0.12 | $0.30 |
| Operating Cash Flow | N/A | $2,184,800 |
| Cash & Equivalents | $4,071,100 | $4,071,100 |
| Current Ratio | 2.85:1 | 2.85:1 |
| Long-Term Debt | $0 | $0 |
Revenue Composition (Six Months): Royalties ($8.2M), Merchandise Sales ($7.0M), Franchise Fees ($0.27M), and Other ($0.32M).
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 11.0% for the quarter and 10.0% for the six-month period compared to 2002. This was driven by a 27.8% drop in Direct Franchisee Sales (Play It Again Sports buying group) due to a strategic shift encouraging franchisees to buy directly from vendors, and a reduction in the number of open franchised stores (19 fewer than the prior year).
- Profitability: Despite lower revenue, Net Income increased 4.5% for the quarter ($756,400 vs. $724,000) and 4.4% for the six months ($1.88M vs. $1.80M). This was aided by a significant increase in interest and other income ($181,200 for the quarter vs. $79,200 in 2002) due to investment gains and higher interest-earning balances.
- Store Count: Total store count decreased from 830 to 819 over the quarter, with 17 closures and 6 openings. Notable closures occurred in Play It Again Sports and Music Go Round.
- Stock Repurchases: The company utilized $1.875 million in cash to repurchase 200,000 shares of common stock during the six-month period.
Outlook, Risks, and Unusual Items
- Investment Activity: Winmark is executing a $6 million investment in Tomsten, Inc. (parent of Archiver's retail chain), with the final $2 million installment paid on August 1, 2003. Additionally, a $1 million equity investment in eFrame, LLC was made on July 1, 2003.
- Accounting Changes: The company adopted SFAS No. 123 fair value method for stock-based compensation in 2002. Pro forma net income for the six months ended June 28, 2003, would have been $1.56 million (vs. reported $1.88 million) if all stock options were expensed under this method.
- Liquidity: Management believes cash generated from operations and existing investments ($6.3 million in cash and marketable securities) are adequate to meet current obligations. The company has no outstanding debt.
- Contingencies: The company remains a guarantor on leases for sold or closed stores, with contingent liability up to $45,200 as of June 28, 2003.
Investor Verification Checklist
- Franchisee Sales Strategy: Verify the long-term impact of the strategic shift reducing Direct Franchisee Sales revenue on overall royalty growth.
- Investment Returns: Monitor the performance of the $6 million Tomsten/Archiver's investment and the new $1 million eFrame investment, as these represent significant capital allocation.
- Store Turnover: Assess the net store closure trend (17 closed vs. 6 opened in Q2) and its effect on future royalty streams.
- Stock-Based Compensation: Review the pro forma impact of stock option expenses on future earnings per share as the company continues to grant options.