Winmark Corporation 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended June 25, 2005. Winmark Corporation operates two primary segments: Franchising (licensing retail concepts including Play It Again Sports, Once Upon A Child, Plato's Closet, and Music Go Round) and Leasing (equipment leasing via Winmark Capital and Winmark Business Solutions). As of the period end, the company operated 794 franchised stores.
Key Financial Metrics
| Metric | Six Months Ended 6/25/05 | Six Months Ended 6/26/04 |
|---|---|---|
| Total Revenue | $13,508,500 | $14,224,200 |
| Net Income | $1,242,500 | $2,086,600 |
| Diluted EPS | $0.19 | $0.32 |
| Operating Cash Flow | $2,187,800 | $2,336,000 |
| Cash & Equivalents | $6,725,800 | $5,983,500 (Year End 2004) |
| Current Ratio | 3.4:1 | 4.2:1 (Q2 2004) |
| Debt | $0 (No material debt outstanding) | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 5.0% year-over-year. This was driven by a 20.0% drop in merchandise sales due to a strategic shift encouraging franchisees to buy directly from vendors and the closure of 14 Play It Again Sports stores.
- Profitability Pressure: Net income fell 40.5% to $1.24 million. Operating income decreased 35.7% to $2.16 million.
- Expense Growth: Selling, General, and Administrative (SG&A) expenses rose 18.7% to $8.03 million. This increase was primarily due to $1.03 million in costs associated with launching the new leasing segment, higher salaries, and increased stock-based compensation.
- Segment Performance:
- Franchising: Segment contribution increased 2.2% to $5.38 million, supported by higher royalties from Plato's Closet and Once Upon A Child.
- Leasing: The segment reported a loss of $875,500, a 442% increase in losses compared to the prior year, reflecting startup costs for the new business line.
- Investment Losses: Losses from equity investments (eFrame and Commercial Credit Group) increased to $183,300 from $82,400 in the prior year.
Outlook, Risks, and Unusual Items
- Capital Resources: The company maintains a $15.0 million line of credit with LaSalle Bank, of which up to $10.0 million can be used for leasing operations. No funds have been drawn as of the filing date.
- Stock Repurchases: The company repurchased 52,350 shares for $944,100 during the quarter. Subsequent to the period end, an additional 137,817 shares were purchased for $2.59 million.
- Store Activity: In the first six months, 20 stores were opened and 15 closed. Renewal activity was strong, with 26 of 28 available agreements renewed.
- Risks: Management notes that results are dependent on franchisee performance and the success of the new leasing segment. Long-term investments in private companies (Tomsten, eFrame, Commercial Credit Group, BridgeFunds) are illiquid and subject to impairment risks.
- Unusual Items: A gain of $17,400 was recorded on the sale of marketable securities, compared to a gain of $173,800 in the prior year. The company also recorded a $185,000 gain from the early termination of a Music Go Round lease subsequent to the period end.
Investor Verification Checklist
- Leasing Segment Viability: Verify the timeline for the leasing segment to reach profitability given the significant current losses ($875k YTD) and high startup costs.
- Franchisee Direct Purchasing: Assess the long-term impact of the strategic shift reducing merchandise sales revenue on overall royalty growth and franchisee support.
- Equity Investment Health: Review the financial status of investees (eFrame, Commercial Credit Group) to gauge the sustainability of recurring equity losses.
- Store Count Trends: Monitor the net store count, specifically the decline in Play It Again Sports locations versus growth in Plato's Closet and Once Upon A Child.
- Stock-Based Compensation: Confirm the impact of stock option expenses on future earnings, as pro-forma EPS is lower than reported EPS.