Winmark Corp. 10-Q Summary: Quarter Ended September 26, 2009
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Winmark Corporation and subsidiaries for the three and nine months ended September 26, 2009. Winmark operates two primary segments: franchising (brands include Play It Again Sports, Once Upon A Child, Plato's Closet, Music Go Round, and Wirth Business Credit) and equipment leasing (Winmark Capital and Wirth Business Credit). As of the period end, the company operated 911 franchises and maintained a leasing portfolio of $39.1 million.
Key Financial Metrics
| Metric | 9 Months Ended Sep 26, 2009 | 9 Months Ended Sep 27, 2008 |
|---|---|---|
| Total Revenue | $27.9 million | $26.7 million |
| Net Income | $4.4 million | $3.2 million |
| Earnings Per Share (Diluted) | $0.82 | $0.58 |
| Operating Cash Flow | $11.1 million | $6.4 million |
| Cash and Equivalents (End of Period) | $11.5 million | $2.9 million |
| Total Debt (Line of Credit + Notes) | $32.9 million | $34.4 million |
| Current Ratio | 1.7 to 1.0 | 1.3 to 1.0 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 4.5% year-over-year for the nine-month period. Royalties rose 7.8% driven by growth in Plato's Closet and Once Upon A Child, while franchise fees dropped 40.2% due to fewer new store openings.
- Profitability: Net income increased 36.3% to $4.4 million. Operating income improved to $8.1 million, aided by a 4.6% reduction in selling, general, and administrative (SG&A) expenses.
- Leasing Segment: Leasing income increased 20.2% to $7.1 million. However, the provision for credit losses rose significantly to $1.9 million (from $1.2 million) due to higher write-offs and delinquencies in the small-ticket financing business.
- Liquidity: Cash and cash equivalents surged from $2.1 million at the start of the year to $11.5 million, supported by strong operating cash flows and reduced equipment purchases for leases ($12.2 million vs. $16.7 million prior year).
Outlook, Risks, and Unusual Items
- Capital Structure: The company amended its revolving credit facility in August 2009, reducing the aggregate commitment from $55.0 million to $40.0 million. As of September 26, $10.3 million was outstanding with $29.7 million available.
- Stock Repurchases: The company repurchased 183,326 shares of common stock for $2.5 million during the nine-month period. Approximately 391,215 shares remain available under the repurchase plan.
- Investment Risks: The company holds significant investments in private companies (Tomsten, Inc. and BridgeFunds, LLC). Tomsten reported a net loss of $302,300 for the nine-month period. A modification agreement with BridgeFunds, LLC was executed in October 2009, extending the maturity of $2.0 million in notes to September 2010 and increasing the interest rate to 15%.
- Forward-Looking Statements: Management believes current capital resources are adequate for 2009 operations but notes that results are subject to economic conditions and credit quality in the leasing portfolio.
Investor Verification Checklist
- Verify the sustainability of the 20.2% increase in leasing income against the rising trend in credit loss provisions ($1.9M).
- Confirm the impact of the reduced credit facility ($40M cap) on future leasing expansion capabilities.
- Monitor the performance of the Tomsten, Inc. investment, which continues to report losses.
- Review the terms of the BridgeFunds, LLC note modification (15% interest rate) and its effect on future cash flows.
- Assess the long-term impact of the 40% decline in franchise fees on future royalty revenue growth.