Winmark Corp. 10-Q Summary: Period Ended September 25, 2004
Business Context and Reporting Period
Winmark Corporation (Winmark) operates a franchise business model for used retail stores under the brands Play It Again Sports, Once Upon A Child, Plato's Closet, and Music Go Round. The company also engages in equipment leasing and strategic equity investments. This report covers the quarterly period ended September 25, 2004, and the nine-month period ended on the same date. As of the period end, Winmark had 787 franchised retail stores.
Key Financial Metrics
| Metric | Three Months Ended 9/25/04 | Nine Months Ended 9/25/04 |
|---|---|---|
| Total Revenue | $6.54 million | $20.76 million |
| Net Income | $1.02 million | $3.10 million |
| Earnings Per Share (Diluted) | $0.15 | $0.48 |
| Operating Cash Flow (9 months) | $3.77 million | |
| Cash and Cash Equivalents | $8.18 million (as of 9/25/04) | |
| Current Ratio | 4.0 to 1.0 | |
| Long-Term Debt | None reported on balance sheet |
Revenue Composition (9 Months): Royalties accounted for 61.3% of total revenue ($12.72 million), while merchandise sales accounted for 33.3% ($6.91 million). Franchise fees contributed 3.3% ($0.69 million).
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 18.0% in the quarter and 12.6% for the nine-month period compared to 2003. This was driven by a strategic shift reducing merchandise sales through the buying group and the sale of five company-owned Music Go Round stores.
- Profitability Improvement: Despite lower revenue, Net Income increased 4.0% for the nine-month period ($3.10 million vs. $2.98 million). Operating income rose 10.7% to $5.03 million due to significant expense reductions.
- Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased 7.0% for the nine months, primarily due to the elimination of salary and rent costs associated with sold company-owned stores.
- Liquidity Expansion: Cash and cash equivalents increased from $4.15 million at year-end 2003 to $8.18 million, bolstered by strong operating cash flows and proceeds from stock option exercises.
Outlook, Risks, and Unusual Items
- Strategic Investments: Winmark has expanded its investment portfolio with a $1.5 million initial investment in Commercial Credit Group, Inc. (equipment leasing) and a $500,000 funded commitment to BridgeFunds Limited (litigation funding). A $15.0 million line of credit was established with LaSalle Bank to support leasing growth.
- Equity Investment Losses: The company recorded a $123,100 loss from its equity investment in eFrame, LLC, representing its pro-rata share of the investee's losses.
- Franchise Growth: Franchise fees increased 21.6% year-over-year due to 33 new store openings. Renewal activity remains strong, with 58 of 64 available agreements renewed in the first nine months.
- Risks: Future results depend on franchisee sales performance and the success of new leasing ventures. The company notes that estimates for royalty revenue and allowance for doubtful accounts could materially differ from actual results.
Investor Verification Checklist
- Verify the sustainability of the royalty revenue growth (up 5.0% YTD) amidst the decline in merchandise sales.
- Confirm the performance and integration of the new equipment leasing operations and the $15 million credit facility.
- Monitor the financial health of equity investees (eFrame, Tomsten, Commercial Credit Group) as they impact non-operating income.
- Assess the long-term impact of the reduced company-owned store footprint on total revenue mix and margin stability.
- Review the utilization of the new line of credit and the drawdown schedule for the BridgeFunds Limited commitment.