Business Context and Reporting Period
Company: Grow Biz International, Inc. (Note: Metadata listed "Winmark Corp," but the filing text identifies the registrant as Grow Biz International, Inc.)
Reporting Period: Three months ended March 27, 1999 (First Quarter 1999).
Business Model: Franchisor of retail concepts (e.g., Play It Again Sports, Once Upon A Child) that buy, sell, trade, and consign used merchandise. The company also operates corporate retail stores and sells inventory to franchisees via a buying group.
Key Financial Metrics
| Metric | Q1 1999 | Q1 1998 |
|---|---|---|
| Total Revenue | $18,535,400 | $25,623,400 |
| Net Income (Loss) | $(175,200) | $690,900 |
| EPS (Basic) | $(0.03) | $0.12 |
| Operating Cash Flow | $(1,793,300) | $3,109,200 |
| Cash and Equivalents (End) | $601,300 | $5,020,500 |
| Current Ratio | 1.4:1 | N/A |
| Total Debt (Current + Long-Term) | $19,041,200 | N/A |
Revenue Breakdown (Q1 1999): Merchandise sales ($12.9M), Royalties ($4.8M), Franchise fees ($0.6M), Advertising/Other ($0.2M).
Margins: Retail gross margins deteriorated to 25.0% from 36.9% in the prior year due to a shift to new video game inventory and markdowns.
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 27.7% year-over-year. Merchandise sales dropped 35.9%, driven by a 42.4% decline in buying group sales (franchisees buying direct from vendors) and a 26.9% drop in retail sales.
- Profitability Reversal: The company swung from a net income of $690,900 in Q1 1998 to a net loss of $175,200 in Q1 1999. Operating income turned negative ($17,300 loss) compared to $1.2M profit previously.
- Cash Flow Deterioration: Operating cash flow shifted from a $3.1M inflow to a $1.8M outflow. This was primarily due to a $5.4M reduction in accounts payable (paying down winter inventory) and a $1.3M reduction in accrued liabilities.
- Store Count: Total store count increased to 1,231 from 1,212, with 44 new stores opened and 25 closed. Notable openings included 11 corporate "It's About Games" stores.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates buying group sales trends will continue to decline. Retail gross margins are expected to return to 1998 levels in the next few quarters as inventory mix normalizes.
- Liquidity: The company believes current cash, future operations, and credit line availability are adequate to meet obligations. A revolving credit line was drawn upon for $1.8M during the quarter.
- Litigation: A shareholder class action was filed by Harbor Finance Partners alleging breach of fiduciary duty regarding a withdrawn $14/share buyout proposal. The company intends to defend vigorously.
- Year 2000 Compliance: Internal systems are being upgraded; costs incurred to date are $76,200 with future costs estimated under $435,300. Risks include potential franchisee non-compliance affecting royalty revenue.
- Unusual Items: The acquisition of Plato's Closet assets for $400,000 plus future royalties was announced in January 1999.
Investor Verification Checklist
- Margin Recovery: Verify if retail gross margins improve in subsequent quarters as predicted, given the heavy markdowns on video game inventory.
- Buying Group Trend: Confirm if the shift of franchisees purchasing directly from vendors (bypassing the buying group) stabilizes or accelerates.
- Liquidity Position: Monitor cash burn rate given the $1.8M operating cash outflow and the significant draw on credit lines.
- Litigation Status: Track the shareholder class action regarding the withdrawn buyout proposal for potential financial impact or settlement.
- Store Performance: Assess the performance of the 11 new corporate "It's About Games" stores opened in Q1 to ensure they offset the decline in comparable store sales.