Winmark Corporation — Q1 2015 Form 10-Q
Business context and period: Unaudited results for the three months ended March 28, 2015, compared with the three months ended March 29, 2014. Winmark franchises five value-oriented retail brands and operates middle-market and small-ticket equipment leasing businesses. It reported 1,099 franchised stores and a $42.9 million net leasing portfolio at quarter-end.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $21.0 million | $14.6 million |
| Operating income | $10.0 million | $7.4 million |
| Net income | $6.1 million | $4.6 million |
| Diluted EPS | $1.17 | $0.86 |
| Operating margin | 47.4% | 51.1% |
| Net margin | 28.8% | 31.3% |
| Operating cash flow | $11.7 million | $7.0 million |
- Revenue increased 44.5%; net income rose 33.0%. Royalties grew 10.4% to $9.7 million, while leasing income increased to $10.0 million from $4.4 million.
- Leasing expense rose to $4.3 million from $0.3 million, primarily alongside higher equipment sales to customers. Management noted that lease income and expense timing can cause period-to-period fluctuations; leasing income less leasing expense was approximately $5.8 million versus $4.1 million.
- SG&A increased 2.4% to $6.2 million. The credit-loss line was a $69,100 recovery/provision benefit, compared with a $38,900 expense in 2014; management attributed the change to net portfolio recoveries.
- Cash and equivalents were $2.2 million at March 28, versus $2.4 million at the prior-year quarter-end. Cash rose $70,600 during the quarter. Investing activities provided $1.5 million, and financing activities used $13.2 million, including $12.9 million of net credit-line repayments.
- At March 28, borrowings under the $35 million credit line were $5.6 million at 3.25%, with $29.4 million available; the company reported covenant compliance. Total assets were $49.1 million and shareholders’ equity was $27.8 million.
Changes, outlook and risks
- Franchising segment revenue rose to $11.0 million from $10.2 million, with segment contribution increasing to $5.6 million from $4.7 million. Leasing segment revenue rose to $10.0 million from $4.4 million, and contribution increased to $4.3 million from $2.7 million.
- Franchise royalties benefited from additional Plato’s Closet and Once Upon A Child stores and higher franchisee retail sales. The company opened 11 stores, closed four, and completed 26 of 27 renewals available during the quarter.
- The leasing portfolio declined from $44.0 million at December 27, 2014 to $42.9 million. Equipment purchases for lease customers were $7.9 million, compared with $6.5 million a year earlier. Three customers’ leased assets represented approximately 16%, 15%, and 13% of total assets. No leases were reported as non-accrual at quarter-end.
- After quarter-end, Winmark announced a self-tender offer for up to 875,000 shares (about 17.5% of outstanding shares) at $84.72 per share, approximately $74.1 million plus expenses. The offer was subject to financing. A credit-line amendment would increase commitments to $60 million and allow up to $30 million of Prudential term notes; the company also described an agreement in principle for up to $25 million of senior notes. Amendment effectiveness and financing remained subject to conditions. The company warned that completing the tender would increase indebtedness and leverage.
- Management expected cash, operating cash flows, leasing-finance sources, the credit line, and anticipated term-note proceeds to fund planned operations through 2015. It cautioned that results for the quarter are not necessarily indicative of full-year results and identified debt-service and financing-access risks. A 1% increase in short-term rates was estimated to reduce annual pretax earnings by $56,000 on quarter-end borrowings.
- No material litigation or material changes to previously disclosed risk factors were reported, apart from the tender-offer and increased-leverage risks. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the tender offer closed, how many shares were purchased, and the final funding mix, interest costs, leverage, and covenant terms.
- Whether the credit-line amendment’s conditions were satisfied by the stated May 29, 2015 deadline and whether the Prudential term-note financing was finalized.
- Whether leasing growth and recoveries are sustainable, including the higher allowance for credit losses, portfolio trend, customer concentrations, and equipment purchase/origination levels.
- Whether franchise royalties and renewal activity continue to support growth, and whether leasing-related revenue and expense timing affects reported margins in subsequent periods.
- The impact of adopting the new revenue-recognition standard; the company said it was evaluating the effect.