Winmark Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 30, 2024; unaudited. Winmark franchises five value-oriented retail brands and operates a middle-market equipment leasing business that it is winding down. It reported 1,327 franchised stores at quarter-end.
Financial performance and liquidity
| Metric | Q1 2024 | Prior comparable quarter |
|---|---|---|
| Revenue | $20.11 million | $20.52 million |
| Operating income | $12.22 million | $12.39 million |
| Net income | $8.82 million | $8.94 million |
| Diluted EPS | $2.41 | $2.49 |
| Operating cash flow | $13.36 million | $13.85 million |
- Revenue declined about 2.0%, operating income about 1.4%, and net income about 1.4% year over year. Operating margin increased to 60.8% from 60.4%; net margin rose to 43.9% from 43.6%.
- Royalties rose 3.1% to $17.27 million, while leasing income fell to $0.84 million from $1.64 million. Merchandise sales decreased to $1.11 million from $1.28 million.
- Cash and cash equivalents were $22.87 million at March 30, versus $13.36 million at year-end 2023. Operating cash flow was $13.36 million; investing activities used $0.09 million and financing activities used $3.79 million. Financing included $2.80 million in dividends and $1.06 million of debt payments.
- Current assets were $26.28 million and current liabilities $14.37 million. Total debt was approximately $68.1 million in principal: $30.0 million of term-loan borrowings and $38.1 million under the Prudential note agreement. The company had no revolving borrowings and $20.0 million of revolving capacity available. It reported compliance with debt covenants.
- Shareholders’ deficit was $52.58 million. The company paid a quarterly dividend of $0.80 per share and made no share repurchases.
Changes, outlook and risks
- Franchising revenue increased to $19.27 million from $18.89 million; franchising segment contribution increased to $11.48 million from $11.21 million. Higher royalties, supported by franchisee sales and additional stores, were partly offset by higher SG&A.
- SG&A rose 2.7% to $6.82 million, primarily due to higher outside services. Lower average corporate borrowings reduced interest expense to $0.74 million from $0.80 million.
- Management continues the orderly run-off of its leasing portfolio and expects leasing income net of leasing expense to decline. That net contribution was $0.8 million, down from $1.3 million.
- During the quarter, 11 franchises opened and three closed. Winmark renewed 38 of 39 agreements available for renewal (97%). Management identifies franchise support, new openings and SG&A control as important to operating-income growth.
- No specific earnings or revenue guidance was provided. Management believes cash, operating cash flows, the credit facility and shelf agreement will be adequate to fund planned operations through 2024. It cautions that future performance and access to refinancing or other capital could affect its ability to meet debt obligations.
- Debt is secured by substantially all company assets and subject to financial covenants. Fixed-rate debt creates refinancing exposure; the company also disclosed foreign-currency exposure and no hedging instruments. A 10% currency-rate movement was estimated to affect annual pretax earnings by approximately $670,000, based on fiscal 2023 currency-denominated revenue and expenses.
- The company reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls. Q1 results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether royalty growth and the 97% renewal rate persist, and how store openings and closures develop.
- The pace and financial impact of the leasing portfolio run-off.
- Debt maturities, required amortization, covenant compliance and the availability and terms of refinancing or additional borrowing.
- Whether cash generation supports planned operations and dividend payments through 2024.
- The balance-sheet and cash-flow effects of dividends, stock-based compensation and foreign-currency exposure.