Winmark Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparative period ended March 30, 2019. Winmark franchises value-oriented resale retail brands and operates middle-market and small-ticket equipment leasing businesses. The interim financial statements are unaudited.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $18.60 million | $18.33 million | Up 1.5% |
| Operating income | $10.10 million | $10.07 million | Up 0.4% |
| Operating margin | 54.3% | 54.9% | Down 0.6 percentage points |
| Net income | $7.32 million | $7.27 million | Up 0.6% |
| Diluted EPS | $1.87 | $1.73 | Up 8.1% |
| Cash from operations | $14.36 million | $14.17 million | Up 1.4% |
- Revenue mix: royalties $11.17 million, down 5.0%; leasing income $5.87 million, up 13.9%; merchandise sales $0.75 million, up 23.4%; franchise fees $0.39 million, broadly unchanged.
- Net income margin was 39.3%, versus 39.7%. Selling, general and administrative expense fell 17.7% to $5.75 million, while interest expense rose to $0.53 million from $0.44 million.
- Leasing expense increased to $1.42 million from $0.70 million. The credit-loss provision rose to $615,400 from $10,100, reflecting management’s estimate of pandemic-related risk to leasing customers.
- Cash and cash equivalents were $28.35 million, plus $50,000 restricted cash, at March 28, 2020. Operating cash flow was $14.36 million; investing activities used $1.74 million and financing activities used $9.41 million.
- Debt included $40.0 million drawn on the revolving credit facility, with $5.0 million additional availability, and $24.9 million principal outstanding on Series A and B notes. The revolver rate was 3.25%–3.60%; note rates were 5.50% and 5.10%. Winmark reported compliance with debt covenants.
- Net investment in leases declined to $21.3 million from $25.3 million at year-end 2019. The allowance for lease credit losses increased to $1.20 million from $0.58 million.
Material changes and business developments
- COVID-19-related store closures and reduced customer traffic contributed to lower royalties. Winmark said the pandemic also affected leasing customers and prompted the increased credit-loss provision.
- Leasing income growth largely reflected increased equipment sales to customers. Leasing-segment contribution rose to $2.89 million from $2.57 million; franchising contribution fell to $7.21 million from $7.50 million.
- Winmark ended the quarter with 1,256 franchised stores. Four opened and four closed; all 31 agreements available for renewal were renewed.
- In January, the company completed a tender offer repurchasing 300,000 shares for approximately $49.0 million, including fees and expenses. It paid a $0.25-per-share dividend. The repurchase, partly financed by revolver borrowings, drove shareholders’ equity into a reported deficit of $29.85 million.
Outlook, risks and other items
- Management said the pandemic’s duration, scope and financial impact could not be reasonably estimated. Temporary store closures, reduced traffic, weaker consumer spending and potential deterioration in leasing-customer credit quality could continue to affect results.
- Winmark believed cash on hand, operating cash flows, lease-discounting sources and its credit line would be adequate to fund planned operations through 2020. This expectation is subject to substantial COVID-19 uncertainty; the filing provides no specific earnings or revenue guidance.
- The company identified a 1% increase in short-term rates as reducing annual pretax earnings by approximately $400,000; it had no interest-rate derivatives. The credit facility terminates in July 2021, with commitments scheduled to decrease by $5.0 million in July 2020.
- Management stated that results for the quarter are not necessarily indicative of full-year results. No material litigation or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Subsequent effects of COVID-19 on franchisee sales, store operations, royalty collections and customer traffic.
- Changes in lease delinquencies, non-accrual balances, credit-loss allowances and equipment residual values.
- Liquidity and covenant headroom after the tender offer, including the July 2020 revolver commitment reduction and July 2021 facility maturity.
- Whether the reduced leasing portfolio and lower equipment installations affect future leasing-segment income.
- Shareholders’ equity deficit and the cash and debt implications of future repurchases or dividends.