Winmark Corporation — Q2 2021 Form 10-Q
Business context and reporting period. The unaudited quarter ended June 26, 2021; comparisons are to the quarter ended June 27, 2020. Winmark franchises five resale retail brands and also operates an equipment-leasing business. It reported 1,266 franchised stores at quarter-end. The six-month results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $19.0m | $12.4m | $37.7m | $31.0m |
| Operating income | $12.0m | $6.7m | $24.6m | $16.8m |
| Net income | $8.9m | $5.1m | $18.2m | $12.4m |
| Diluted EPS | $2.33 | $1.33 | $4.74 | $3.21 |
| Operating margin | 62.9% | 53.9% | 65.4% | 54.2% |
| Net margin | 46.9% | 40.8% | 48.4% | 39.9% |
- Revenue mix and performance: Q2 royalties were $14.7m, up 88.5%; six-month royalties were $28.8m, up 51.6%, primarily reflecting stronger franchisee retail sales and, versus 2020, fewer pandemic-related store closures and traffic disruptions. Leasing revenue declined to $2.8m in Q2 and $6.1m for the six months, from $3.5m and $9.3m, respectively.
- Cash flow: First-half operating cash flow was $23.1m, versus $23.2m. Investing used $0.1m; financing used $22.4m, principally for $18.9m of share repurchases, $2.6m of dividends and $2.1m of debt payments. Cash, cash equivalents and restricted cash were $7.2m at June 26, 2021, versus $1.3m at June 27, 2020.
- Liquidity and debt: The company had $25.0m available and no borrowings on its revolving credit facility. Principal outstanding on Series A and B notes was $12.0m and $7.8m, respectively; the balance sheet reports notes payable net of issuance costs. The company was in compliance with debt covenants. Current assets were $16.1m and current liabilities $11.3m. Shareholders’ deficit was $12.7m, following substantial repurchases and dividends.
Material changes, outlook and risks
- In May 2021, Winmark decided to stop soliciting new leasing customers and run off its leasing portfolio. Net investment in leases fell to $7.8m from $13.3m at year-end 2020; management expects leasing income net of expense, lease-equipment purchases and portfolio size to continue declining during the run-off.
- Franchise segment contribution rose to $10.5m for Q2 and $21.3m for the first half; leasing segment contribution declined to $1.4m and $3.4m, respectively. All 61 franchise agreements available for renewal in the first half were renewed; seven stores opened and five closed.
- Management cited higher franchisee sales as the main driver of royalty growth. SG&A rose 17.0% in Q2, mainly from advertising production expenses, but 1.8% for the first half. First-half effective tax rate was 24.0%, versus 21.4%, primarily due to lower tax benefits on exercised nonqualified options and higher state taxes.
- Management believed cash on hand, operating cash flows and the available credit line would fund planned operations through 2022. No specific earnings or revenue guidance was provided.
- COVID-19 remains a material uncertainty: renewed restrictions, store closures, traffic changes, consumer spending and shifts toward e-commerce could affect franchisees and royalties. Management cautioned that pandemic effects are difficult to predict and may persist. Other risks include debt-service and refinancing needs, lease-portfolio credit and residual-value exposure, and foreign-currency movements. No material litigation, off-balance-sheet arrangements or changes to previously disclosed risk factors were reported.
Investor facts to verify
- Whether franchisee retail sales and royalty growth persist beyond the pandemic-related comparison period, and how store traffic and e-commerce trends develop.
- The pace and cash realization of the leasing run-off, including customer collections, equipment residual values and related credit-loss provisions.
- Cash generation relative to repurchases, dividends and scheduled debt repayments; covenant headroom and continued access to the $25.0m credit facility.
- Whether management’s liquidity expectation through 2022 remains supported by operating performance and pandemic developments.