Winmark Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 28, 2019 (52 weeks). The filing also reports unaudited fourth-quarter results. Winmark franchises five resale retail brands and operates middle-market leasing and small-ticket financing businesses.
Financial performance and position
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $73.3 million | $72.5 million | +1.1% |
| Operating income | $43.1 million | $41.8 million | +3.3% |
| Net income | $32.1 million | $30.1 million | +6.7% |
| Diluted EPS | $7.84 | $7.26 | +8.0% |
| Operating margin | 58.8% | 57.6% | +1.2 percentage points |
| Net margin | 43.8% | 41.6% | +2.2 percentage points |
- Revenue mix: Royalties were $51.4 million, up 6.6%, and leasing income was $16.1 million, down 11.7%. Franchising revenue rose to $57.2 million; leasing revenue fell to $16.1 million.
- Segment operating contribution: Franchising increased 10.3% to $35.2 million; leasing decreased 19.4% to $8.0 million. Royalties benefited from higher franchisee sales and additional stores. Leasing weakness reflected a smaller portfolio and fewer customer equipment installations.
- Cash flow: Operating activities provided $50.6 million, versus $34.9 million in 2018. Comparability is affected by adoption of lease accounting guidance: $19.4 million of lease principal collections was classified as operating cash flow in 2019, whereas comparable collections were classified as investing activities in 2018. Investing activities used $9.2 million; financing activities used $18.9 million.
- Liquidity: Cash, cash equivalents and restricted cash were $25.2 million at year-end, compared with $2.6 million a year earlier. Working capital was $29.3 million. The company reported $45.0 million of available capacity under its revolving credit facility and no revolver borrowings at year-end.
- Debt and obligations: Notes payable were $25.7 million at year-end, with an additional $3.5 million of discounted lease rentals recorded as liabilities. Notes carry fixed rates of 5.10%–5.50% and are secured, as are the credit facilities, by substantially all company assets. The company was in covenant compliance at year-end.
- Q4 2019: Revenue was $17.9 million, operating income $10.9 million, and net income $8.5 million; diluted EPS was $2.08. Q4 2018 revenue was $17.1 million, operating income $10.2 million, net income $7.7 million, and diluted EPS $1.83.
Material changes and notable items
- Franchised stores increased from 1,241 to 1,256: 31 opened and 16 closed. The company reported a 98% renewal rate for 89 agreements due for renewal.
- Equipment purchases for lease customers dropped to $9.0 million from $23.1 million in 2018; the net leasing portfolio contracted to $25.3 million from $39.0 million.
- Winmark repurchased 150,000 shares in its 2019 tender offer for approximately $24.0 million, including fees, and paid $3.4 million in dividends. FY2019 dividends were $0.90 per share, versus $0.56 in 2018.
- Subsequent event: In January 2020, the company completed a separate tender offer for 300,000 shares for approximately $49.0 million including expenses, funded partly with $19.2 million of revolver borrowing. This was not included in year-end 2019 balances.
- The effective tax rate was 22.5%, compared with 24.1% in 2018; management attributed the decline primarily to tax benefits from exercises of non-qualified stock options.
- Adoption of ASC 842 in 2019 resulted in recognition of operating lease right-of-use assets and liabilities. It did not materially affect the income statement; prior-period balance sheets were not recast.
Outlook, risks and contingencies
- Management said cash on hand, franchising cash flows, lease-discounting sources and the revolving facility should fund planned operations through 2020. No specific revenue or earnings guidance was provided.
- Management aims to support franchisee sales, open additional stores, grow lease originations and control overhead. It cautioned that continued low equipment purchases and portfolio contraction could reduce long-term leasing income.
- Key risks include franchise renewals and openings, competition from online and physical retailers, franchisees’ access to financing, reliable supplies of quality used goods, lease credit losses and customer concentration, economic downturns, covenant compliance and access to financing. One customer represented approximately 18% of net investment in leases at year-end.
- The company disclosed no material litigation and no off-balance-sheet arrangements. Management said asserted and unasserted claims arising in the ordinary course were not expected to materially affect financial position or results.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; internal control was reported effective as of December 28, 2019.
Important facts for investors to verify
- Whether the post-year-end $49.0 million tender offer and $19.2 million revolver draw materially changed liquidity, leverage and covenant headroom.
- Whether lease originations and the $25.3 million lease portfolio stabilize or continue to decline, and the effect on leasing segment earnings.
- Whether franchisee retail sales, store openings and renewal rates sustain royalty growth.
- How much of reported operating cash flow reflects lease principal collections and the accounting classification change, rather than recurring cash generation.
- Whether the lease allowance for credit losses remains adequate given portfolio concentrations and economic conditions.