Winmark Corp (WINA) Q2 2024 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 29, 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 1,336 franchises.
Key Financial Metrics
| Metric | Q2 2024 (3 Months) | YTD 2024 (6 Months) |
|---|---|---|
| Total Revenue | $20.12 million | $40.23 million |
| Net Income | $10.43 million | $19.25 million |
| Diluted EPS | $2.85 | $5.26 |
| Operating Cash Flow (YTD) | $21.59 million | |
| Cash & Equivalents | $29.40 million (as of June 29, 2024) | |
| Total Debt | ~$66.96 million ($30M Term Loan + $37.1M Notes Payable) | |
| Operating Margin (YTD) | 62.7% |
Material Changes vs. Prior Period
- Revenue: Total revenue decreased slightly by 1.2% year-over-year (YTD) to $40.23 million. This was driven by a 3.5% increase in Royalties (due to net store growth and higher franchisee sales) offset by a significant decline in Leasing Income and Merchandise Sales.
- Leasing Segment: Leasing income dropped 48.8% YTD to $1.36 million as the company continues its orderly run-off of the portfolio, having ceased soliciting new customers in May 2021.
- Expenses: Selling, General, and Administrative (SG&A) expenses increased 4.9% YTD to $13.06 million, primarily due to higher advertising costs and outside services.
- Net Income: Net income remained relatively flat, decreasing 0.3% YTD to $19.25 million, despite the revenue dip, due to lower interest expense and tax benefits from stock option exercises.
- Store Count: Net store growth of 17 units YTD (24 opened, 7 closed), resulting in a 99% renewal rate for available franchise agreements.
Guidance, Outlook, and Risks
- Outlook: Management expects leasing income to continue decreasing through the run-off period. The company anticipates adequate liquidity to fund operations through 2025 via operating cash flows and existing credit facilities.
- Capital Allocation: The company paid $6.0 million in dividends YTD ($0.80 and $0.90 per share). No share repurchases were made in the first six months of 2024, though 78,600 shares remain available under the existing authorization.
- Liquidity: The company maintains a $20 million Line of Credit (currently $0 outstanding) and a $30 million delayed draw term loan. A Shelf Agreement with Prudential allows for up to $100 million in additional senior notes, though none have been issued.
- Risks: Primary risks include the ability to refinance maturing debt, potential economic downturns affecting franchisee sales, and the continued decline of the leasing segment. The company is currently in compliance with all financial covenants.
Investor Verification Checklist
- Franchisee Health: Verify the sustainability of the 3.5% royalty growth against broader retail trends for second-hand goods.
- Leasing Run-off: Monitor the pace of the leasing portfolio decline to ensure it aligns with the "orderly run-off" strategy and does not accelerate unexpectedly.
- Debt Maturity: Review the maturity schedule of the $37.1 million in Prudential notes (Series A, B, and C) and the $30 million term loan maturing in 2029.
- SG&A Leverage: Assess whether the 4.9% increase in SG&A expenses is a one-time advertising spend or a structural increase that could pressure future margins.
- Dividend Sustainability: Confirm that operating cash flows ($21.6M YTD) remain sufficient to support the current dividend payout rate ($6.0M YTD) alongside debt service obligations.