Winmark Corp (WINA) Q3 2024 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 28, 2024. Winmark Corporation operates as a franchisor of value-oriented retail concepts (Plato's Closet, Once Upon A Child, Play It Again Sports, Style Encore, and Music Go Round) and maintains a run-off equipment leasing business (Winmark Capital). As of the period end, the company operated 1,343 franchised stores.
Key Financial Metrics
| Metric | Q3 2024 | Q3 2023 | 9M 2024 | 9M 2023 |
|---|---|---|---|---|
| Total Revenue | $21.51M | $22.32M | $61.74M | $63.20M |
| Net Income | $11.12M | $11.15M | $30.37M | $30.46M |
| Diluted EPS | $3.03 | $3.05 | $8.29 | $8.40 |
| Operating Income | $14.93M | $15.12M | $40.16M | $40.76M |
| Operating Margin | 69.4% | 67.8% | 65.1% | 64.5% |
| Cash & Equivalents | $37.20M | $40.56M | Balance Sheet End of Period | |
| Total Debt (Principal) | $66.0M | $66.0M | Includes $30M Term Loan & $36M Notes | |
| Operating Cash Flow (9M) | $33.70M (vs $35.23M prior year) |
Material Changes vs. Prior Period
- Revenue Mix Shift: Royalty revenue increased 1.6% in Q3 and 2.8% for the nine months, driven by net store growth. Conversely, leasing income declined significantly (down 75% in Q3 and 57% for 9M) as the company continues its orderly run-off of the leasing portfolio.
- Expense Management: Selling, General, and Administrative (SG&A) expenses decreased 5.3% in Q3 due to lower compensation costs, though they increased 1.5% for the nine-month period due to higher advertising and outside services.
- Store Count: Net store count increased by 24 units (36 opened, 12 closed) year-to-date. Renewal rates remained strong at 97% for the nine-month period.
- Liquidity: Cash and cash equivalents increased to $37.2 million from $13.4 million at the end of fiscal 2023, despite significant dividend payments.
Guidance, Outlook, and Risks
- Special Dividend: On October 16, 2024, the Board approved a $7.50 per share special cash dividend (approx. $26.4 million total), payable December 2, 2024, to be funded by cash on hand.
- Leasing Outlook: Management expects leasing income net of expenses to continue decreasing as the portfolio runs off; no new leasing customers are being solicited.
- Capital Resources: The company maintains a $20 million Line of Credit (currently $0 outstanding) and a Shelf Agreement with Prudential allowing up to $100 million in senior notes. Management believes current cash, operating flows, and credit facilities are adequate to fund operations through 2025.
- Risks: Primary risks include the ability to refinance debt, economic conditions affecting franchisee performance, and the successful execution of the leasing run-off strategy.
Investor Verification Checklist
- Dividend Impact: Verify the impact of the $26.4 million special dividend on year-end liquidity and debt covenants.
- Leasing Run-off: Monitor the trajectory of leasing income decline to ensure it aligns with the "orderly run-off" strategy and does not accelerate unexpectedly.
- Franchise Renewals: Track the 97% renewal rate to ensure franchisee satisfaction remains high, as this is the primary driver of recurring royalty revenue.
- Debt Maturities: Review the maturity schedule for the $36 million in Prudential notes ($6 million amortizing 2024-2027, $30 million maturing 2028) and the $30 million CIBC term loan (maturing 2029).