Business Context and Reporting Period
Company: Grow Biz International, Inc. (Note: Metadata listed "WINMARK CORP" but filing text confirms "Grow Biz International, Inc.")
Reporting Period: Quarter and nine months ended September 29, 2001.
Business Model: Franchisor of retail concepts (Play It Again Sports, Once Upon A Child, Music Go Round, ReTool, Plato's Closet) that buy, sell, and trade used merchandise. The company also operates corporate retail stores and sells inventory to franchisees via a buying group.
Key Financial Metrics
| Metric | 3 Months Ended 9/29/01 | 9 Months Ended 9/29/01 |
|---|---|---|
| Total Revenue | $9.13 million | $27.53 million |
| Net Income | $1.25 million | $2.61 million |
| Diluted EPS | $0.21 | $0.46 |
| Operating Cash Flow (9mo) | $6.87 million | |
| Cash & Equivalents (End of Period) | $3.57 million | |
| Current Ratio | 1.69 to 1.0 | |
| Long-Term Debt | $158,000 | |
| Shareholders' Equity | $6.10 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 21% for the quarter and 25% for the nine-month period compared to 2000. This was driven by a strategic shift reducing buying group sales (franchisees buying direct from vendors) and the prior-year sale of the Computer Renaissance franchise system.
- Profitability Improvement: Despite lower revenue, Net Income increased significantly (69% for the quarter, turning from a loss to profit for the nine-month period). This was aided by a $879,000 gain on the settlement of the Computer Renaissance sale and improved retail gross margins (48.3% vs 39.7% in Q3).
- Debt Reduction: The company repaid $4.12 million of its Rush River credit facility in Q3 2001, reducing long-term debt from $3.96 million to $158,000. This triggered a one-time charge of $380,800 in interest expense due to debt discount amortization.
- Store Count: Total store count decreased slightly to 872 (down from 899 at the start of the period) due to closures outpacing openings, particularly in the Play It Again Sports and Music Go Round brands.
Guidance, Outlook, and Risks
- Liquidity: Management believes cash flow from operations and the remaining $2.5 million availability under the Rush River Facility are adequate to meet current obligations.
- Stock Repurchase: The company activated a stock repurchase program in September 2001. Since inception, 2.56 million shares have been repurchased at an average price of $11.70.
- Contingencies: The company remains a guarantor on leases for sold or closed stores, with contingent liability up to $216,000 through 2006.
- Accounting Changes: The company is reviewing the impact of new FASB statements (SFAS 141 and 142) regarding business combinations and goodwill, which will eliminate goodwill amortization effective January 1, 2002.
- Market Risk: The company has fixed-rate debt and is not exposed to significant cash flow risks from interest rate changes.
Investor Verification Checklist
- Revenue Quality: Verify the sustainability of revenue given the strategic shift away from the high-volume buying group model toward direct vendor purchasing by franchisees.
- One-Time Gains: Confirm the $879,000 gain on the Computer Renaissance settlement is non-recurring and exclude it when assessing core operating performance.
- Debt Covenants: Monitor compliance with the Rush River Facility covenant requiring minimum shareholder equity of $1,922,000 (currently met at $6.10 million).
- Store Economics: Assess the impact of closing under-performing corporate stores on future royalty revenue and brand presence.
- Contingent Liabilities: Track the status of the $216,000 in lease guarantees for closed locations.