Winmark Corporation — Q1 2013 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 30, 2013, compared with the three months ended March 31, 2012. Winmark franchises value-oriented resale retail brands and operates middle-market and small-ticket equipment-leasing businesses. At quarter-end, it reported 983 franchised stores and a $35.8 million net leasing portfolio.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $13.15 million | $11.83 million | Up 11.1% |
| Income from operations | $6.68 million | $5.85 million | Up 14.2% |
| Operating margin | 50.8% | 49.4% | Up 1.4 percentage points |
| Net income | $4.06 million | $3.52 million | Up 15.4% |
| Net margin | 30.8% | 29.7% | Up 1.1 percentage points |
| Diluted EPS | $0.78 | $0.67 | Up 16.4% |
| Operating cash flow | $6.72 million | $4.53 million | Up $2.19 million |
- Revenue mix: royalties were $8.47 million, leasing income $3.41 million, merchandise sales $0.67 million, franchise fees $0.41 million and other revenue $0.19 million.
- Royalties rose 2.2%; leasing income rose about 42%, primarily reflecting a larger lease portfolio and sales-type lease accounting. Franchise fees increased, while merchandise sales declined.
- Franchising segment contribution was essentially flat at $4.83 million. Leasing segment contribution increased to $1.84 million from $1.02 million.
- SG&A increased 7.8% to $5.54 million, primarily from compensation, benefits and advertising production expenses. The effective tax rate was 38.3%, versus 39.2%.
Financial position and liquidity
- At March 30, 2013, cash and cash equivalents were $2.19 million; current assets were $18.59 million and current liabilities were $14.72 million. The company reported a 1.3-to-1 current ratio.
- Line-of-credit borrowings were $4.5 million, down from $10.8 million at December 29, 2012. The $35 million facility had $30.5 million available, bore interest at 2.95%–3.75%, and matures February 29, 2016. Winmark said it was in compliance with covenants.
- Financing activities used $6.57 million, mainly reflecting $6.3 million of net line-of-credit repayments, $0.27 million of share repurchases and $0.20 million of dividends. Cash declined by $41,900 during the quarter.
- Investing activities used $0.20 million: $4.67 million of equipment purchases for lease customers was largely offset by $4.53 million of lease principal collections.
- The company also reported $0.996 million of discounted lease rentals outstanding, financed on a non-recourse basis at a weighted-average rate of 3.0%.
Material changes, outlook and risks
- Winmark opened 21 franchises and closed six, ending the quarter with 983 stores. All 19 franchise agreements available for renewal were renewed.
- The lease portfolio was $35.8 million, down from $36.2 million at year-end but up from $29.6 million a year earlier. No lease customer represented more than 10% of total assets. At quarter-end, all reported lease balances were accruing; none were classified as non-accrual.
- Tomsten, in which Winmark had invested $8.5 million for a 22% interest, was fully impaired in Q4 2012; its carrying value remained zero. A $2.0 million BridgeFunds note investment was also impaired to zero, and management said it expected no cash flows from it.
- Management believed cash on hand, franchising cash generation, lease-discounting sources and the credit line would fund planned operations through 2013. This is a liquidity outlook, not earnings guidance; the filing cautions that quarterly results are not necessarily indicative of full-year results.
- Key risks include franchisee performance and renewals, lease originations and credit losses, expense control, and estimates used in royalty recognition and lease-credit-loss allowances. A 1-percentage-point increase in short-term rates was estimated to reduce annual pretax earnings by $45,000. No material litigation, off-balance-sheet arrangements or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether royalty growth, franchise openings and renewal rates continue, and how franchisee sales affect royalty estimates.
- Whether lease originations sustain portfolio growth and whether credit quality and the $0.80 million lease-loss allowance remain appropriate.
- How leasing income and costs develop, given the impact of lease classification and timing on reported results.
- Whether cash generation supports planned operations and capital returns while preserving covenant compliance and access to the credit facility.
- Potential future developments involving the fully impaired Tomsten and BridgeFunds investments, despite their zero carrying values.