Winmark Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are to the three months ended March 26, 2011. Winmark franchises value-oriented retail brands and operates equipment-leasing businesses. At quarter-end, it had 939 franchised stores and a $29.6 million leasing portfolio. Financial statements are unaudited.
Financial performance
| Metric | Q1 2012 | Comparable 2011 period |
|---|---|---|
| Total revenue | $11.83 million | $11.10 million |
| Income from operations | $5.85 million | $5.21 million |
| Net income | $3.52 million | $3.03 million |
| Diluted EPS | $0.67 | $0.58 |
| Operating margin | 49.4% | 47.0% |
| Net margin | 29.7% | 27.2% |
| Operating cash flow | $4.53 million | $7.70 million |
Revenue rose 6.6%, while operating income increased 12.2% and net income increased 16.2%. Royalties grew 17.5% to $8.29 million, primarily on higher Plato’s Closet and Once Upon A Child franchisee sales and additional Plato’s Closet stores. Franchise fees rose to $285,000 from $75,000. Leasing income declined to $2.39 million from $3.24 million; management attributed the decrease primarily to lower equipment sales to customers. SG&A increased 6.0% to $5.14 million, mainly due to compensation and benefits. The credit-loss provision was a $53,000 benefit, versus a $45,400 expense, reflecting net recoveries and lower delinquencies.
Cash, debt and liquidity
Cash and cash equivalents were $2.09 million at March 31, 2012, down from $9.02 million at year-end 2011. The company paid a $5.00-per-share special dividend plus a $0.03 quarterly dividend, totaling $25.5 million; the special dividend was funded with cash and net line-of-credit borrowings of $12.8 million. Q1 financing activities used $12.69 million overall. Investing activities provided $1.23 million, including proceeds from marketable securities, lease receivable collections and equipment purchases for lease customers.
Line-of-credit borrowings were $12.1 million at quarter-end, with rates of 3.24%–3.75%; $22.9 million remained available under the $35 million facility, which matures February 29, 2016 and is secured by substantially all assets. The company reported covenant compliance. Its current ratio was 0.8 at March 31, 2012; management said cash, franchise cash generation, lease-financing sources and the credit line should fund planned operations through 2012. A one-percentage-point increase in short-term rates would reduce annual pretax earnings by an estimated $121,000.
Segments, balance sheet and notable items
- Franchising revenue was $9.44 million versus $7.85 million; segment contribution increased 29.1% to $4.83 million.
- Leasing segment revenue was $2.39 million versus $3.26 million; segment contribution fell to $1.02 million from $1.47 million.
- Total assets were $39.29 million, compared with $47.75 million at December 31, 2011. Shareholders’ equity was $14.02 million versus $35.11 million, primarily reflecting the special dividend.
- Long-term investments were $3.78 million and included illiquid holdings in Tomsten and BridgeFunds. BridgeFunds notes remained impaired, with an $883,100 valuation allowance established in 2011; no additional impairment was recorded in Q1 2012. No principal or interest was received during the quarter, and interest accrual had stopped in 2010.
- One leasing customer’s leased assets represented approximately 13% of total assets. Net investment in leases was $29.56 million; $94,300 was on non-accrual at quarter-end.
- Winmark opened 13 stores and closed four during the quarter; 37 of 42 agreements available for renewal were renewed.
Outlook, risks and other disclosures
Management identified franchisee support and sales, franchise openings, lease originations and credit performance, and expense control as drivers of future operating income. The company cautioned that quarterly results are not necessarily indicative of full-year results. Key exposures include interest-rate sensitivity, lease credit losses, dependence on franchisee performance and the uncertainty of recoveries from private-company investments. Management reported no material litigation, no material change to the risk factors in its 2011 Form 10-K, and no off-balance-sheet arrangements. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether franchisee sales and royalty growth continue, and whether store openings and renewals sustain the franchise base.
- Lease portfolio performance, customer concentration, delinquencies, recoveries and future equipment originations.
- Liquidity after the special dividend, credit-line usage and covenant headroom, particularly given the 0.8 current ratio.
- Expected cash recovery and impairment assumptions for BridgeFunds and the carrying value of other illiquid investments.
- How variable-rate borrowing costs and rising SG&A affect earnings and management’s stated ability to fund 2012 operations.