WINA 10-Q
Winmark Corp (WINA)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: | Trading Symbol | Name of each exchange on which registered: |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Non-accelerated filer ☐ |
| Accelerated filer ☐ Smaller reporting company Emerging growth company | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
Common stock, no par value,
WINMARK CORPORATION AND SUBSIDIARIES
INDEX
PAGE | ||
CONSOLIDATED CONDENSED BALANCE SHEETS | 3 | |
4 | ||
5 | ||
6 | ||
7 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 | |
17 | ||
18 | ||
18 | ||
18 | ||
18 | ||
18 | ||
19 | ||
19 | ||
19 | ||
19 | ||
20 |
2
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
WINMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
| September 28, 2024 |
| December 30, 2023 | |||
ASSETS | ||||||
Current Assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash |
| |
| | ||
Receivables, less allowance for credit losses of $ |
| |
| | ||
Net investment in leases - current |
| — |
| | ||
Income tax receivable |
| — |
| | ||
Inventories |
| |
| | ||
Prepaid expenses |
| |
| | ||
Total current assets |
| |
| | ||
Property and equipment, net |
| |
| | ||
Operating lease right of use asset | | | ||||
Intangible assets, net | | | ||||
Goodwill |
| |
| | ||
Other assets | | | ||||
Deferred income taxes | | | ||||
$ | | $ | | |||
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) | ||||||
Current Liabilities: | ||||||
Notes payable, net of unamortized debt issuance costs of $ | $ | | $ | | ||
Accounts payable |
| |
| | ||
Income tax payable | | — | ||||
Accrued liabilities |
| |
| | ||
Deferred revenue |
| |
| | ||
Total current liabilities |
| |
| | ||
Long-term Liabilities: | ||||||
Line of credit/Term loan | | | ||||
Notes payable, net of unamortized debt issuance costs of $ | | | ||||
Deferred revenue |
| |
| | ||
Operating lease liabilities | | | ||||
Other liabilities |
| |
| | ||
Total long-term liabilities |
| |
| | ||
Shareholders’ Equity (Deficit): | ||||||
Common stock, |
| |
| | ||
Retained earnings (accumulated deficit) |
| ( |
| ( | ||
Total shareholders' equity (deficit) |
| ( |
| ( | ||
$ | | $ | | |||
The accompanying notes are an integral part of these financial statements.
3
WINMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||
| September 28, 2024 |
| September 30, 2023 |
| September 28, 2024 |
| September 30, 2023 | |||||
Revenue: | ||||||||||||
Royalties | $ | | $ | | $ | | $ | | ||||
Leasing income |
| |
| |
| |
| | ||||
Merchandise sales |
| |
| |
| |
| | ||||
Franchise fees |
| |
| |
| |
| | ||||
Other |
| |
| |
| |
| | ||||
Total revenue |
| |
| |
| |
| | ||||
Cost of merchandise sold |
| |
| |
| |
| | ||||
Leasing expense |
| — |
| |
| |
| | ||||
Provision for credit losses |
| — |
| |
| ( |
| ( | ||||
Selling, general and administrative expenses |
| |
| |
| |
| | ||||
Income from operations |
| |
| |
| |
| | ||||
Interest expense |
| ( |
| ( |
| ( |
| ( | ||||
Interest and other income |
| |
| |
| |
| | ||||
Income before income taxes |
| |
| |
| |
| | ||||
Provision for income taxes |
| ( |
| ( |
| ( |
| ( | ||||
Net income | $ | | $ | | $ | | $ | | ||||
Earnings per share - basic | $ | | $ | | $ | | $ | | ||||
Earnings per share - diluted | $ | | $ | | $ | | $ | | ||||
Weighted average shares outstanding - basic |
| |
| |
| |
| | ||||
Weighted average shares outstanding - diluted |
| |
| |
| |
| | ||||
The accompanying notes are an integral part of these financial statements.
4
WINMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
Retained | |||||||||||
Earnings | |||||||||||
Common Stock | (Accumulated | ||||||||||
| Shares |
| Amount |
| Deficit) |
| Total | ||||
BALANCE, December 30, 2023 | | $ | | $ | ( | $ | ( | ||||
Stock options exercised |
| | | — | | ||||||
Compensation expense relating to stock options |
| — | | — | | ||||||
Cash dividends ($ |
| — | — | ( | ( | ||||||
Comprehensive income (Net income) |
| — | — | | | ||||||
BALANCE, March 30, 2024 |
| | | ( | ( | ||||||
Stock options exercised |
| | | — | |||||||
Compensation expense relating to stock options |
| — | | — | |||||||
Cash dividends ($ |
| — | — | ( | ( | ||||||
Comprehensive income (Net income) |
| — | — | | |||||||
BALANCE, June 29, 2024 |
| | | ( | ( | ||||||
Stock options exercised |
| | | — | |||||||
Compensation expense relating to stock options |
| — | | — | |||||||
Cash dividends ($ |
| — | — | ( | ( | ||||||
Comprehensive income (Net income) |
| — | — | | |||||||
BALANCE, September 28, 2024 |
| | $ | | $ | ( | $ | ( | |||
Retained | |||||||||||
Earnings | |||||||||||
Common Stock | (Accumulated | ||||||||||
| Shares |
| Amount |
| Deficit) |
| Total | ||||
BALANCE, December 31, 2022 | | $ | | $ | ( | $ | ( | ||||
Stock options exercised |
| | | — | |||||||
Compensation expense relating to stock options |
| — | | — | |||||||
Cash dividends ($ |
| — | — | ( | ( | ||||||
Comprehensive income (Net income) |
| — | — | | |||||||
BALANCE, April 1, 2023 |
| | | ( | ( | ||||||
Stock options exercised |
| | | — | |||||||
Compensation expense relating to stock options |
| — | | — | |||||||
Cash dividends ($ |
| — | — | ( | ( | ||||||
Comprehensive income (Net income) |
| — | — | | |||||||
BALANCE, July 01, 2023 |
| | | ( | ( | ||||||
Stock options exercised |
| | | — | | ||||||
Compensation expense relating to stock options |
| — | | — | | ||||||
Cash dividends ($ |
| — | — | ( | ( | ||||||
Comprehensive income (Net income) |
| — | — | | | ||||||
BALANCE, September 30, 2023 |
| | $ | | $ | ( | $ | ( | |||
The accompanying notes are an integral part of these financial statements.
5
WINMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended |
| |||||||
| September 28, 2024 |
| September 30, 2023 |
|
| |||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | | $ | | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation of property and equipment |
| |
| | ||||
Amortization of intangible assets | | | ||||||
Provision for credit losses |
| ( |
| ( | ||||
Compensation expense related to stock options |
| |
| | ||||
Deferred income taxes |
| |
| | ||||
Operating lease right of use asset amortization | | | ||||||
Tax benefits on exercised stock options |
| |
| | ||||
Change in operating assets and liabilities: | ||||||||
Receivables |
| ( |
| ( | ||||
Principal collections on lease receivables | | | ||||||
Income tax receivable/payable |
| ( |
| ( | ||||
Inventories |
| ( |
| | ||||
Prepaid expenses |
| |
| | ||||
Other assets | ( | ( | ||||||
Accounts payable |
| ( |
| ( | ||||
Accrued and other liabilities |
| |
| | ||||
Rents received in advance and security deposits |
| ( |
| ( | ||||
Deferred revenue |
| |
| | ||||
Net cash provided by operating activities |
| |
| | ||||
INVESTING ACTIVITIES: | ||||||||
Purchase of property and equipment |
| ( |
| ( | ||||
Net cash used for investing activities |
| ( |
| ( | ||||
FINANCING ACTIVITIES: | ||||||||
Payments on notes payable | ( | ( | ||||||
Proceeds from exercises of stock options |
| |
| | ||||
Dividends paid |
| ( |
| ( | ||||
Net cash used for financing activities |
| ( |
| ( | ||||
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
| |
| | ||||
Cash, cash equivalents and restricted cash, beginning of period |
| |
| | ||||
Cash, cash equivalents and restricted cash, end of period | $ | | $ | | ||||
SUPPLEMENTAL DISCLOSURES: | ||||||||
Cash paid for interest | $ | | $ | | ||||
Cash paid for income taxes | $ | | $ | | ||||
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Condensed Balance Sheets to the total of the same amounts shown above: | ||||||||
Nine Months Ended |
| |||||||
| September 28, 2024 |
| September 30, 2023 |
|
| |||
Cash and cash equivalents | $ | | $ | | ||||
Restricted cash | | | ||||||
Total cash, cash equivalents and restricted cash | $ | | $ | | ||||
The accompanying notes are an integral part of these financial statements.
6
WINMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Management’s Interim Financial Statement Representation:
The accompanying consolidated condensed financial statements have been prepared by Winmark Corporation and subsidiaries (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The Company has a
Revenues and operating results for the nine months ended September 28, 2024 are not necessarily indicative of the results to be expected for the full year.
Reclassifications
Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. Such reclassifications did not impact net income or shareholders’ equity (deficit) as previously reported.
2. Organization and Business:
The Company offers licenses to operate franchises using the service marks Plato’s Closet®, Once Upon A Child®, Play It Again Sports®, Style Encore® and Music Go Round®. The Company also operates a middle market equipment leasing business under the Winmark Capital® mark.
3. Contract Liabilities:
The Company’s contract liabilities for its franchise revenues consist of deferred revenue associated with franchise fees and software license fees. The table below presents the activity of the current and noncurrent deferred franchise revenue during the first nine months of 2024 and 2023, respectively:
| September 28, 2024 |
| September 30, 2023 | |||
Balance at beginning of period | $ | | $ | | ||
Franchise and software license fees collected from franchisees, excluding amount earned as revenue during the period |
| |
| | ||
Fees earned that were included in the balance at the beginning of the period |
| ( |
| ( | ||
Balance at end of period | $ | | $ | | ||
The following table illustrates future estimated revenue to be recognized for the remainder of 2024 and full fiscal years thereafter related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 28, 2024.
Contract Liabilities expected to be recognized in | Amount | ||
$ | | ||
| | ||
| | ||
| | ||
| | ||
Thereafter |
| | |
$ | | ||
7
4. Fair Value Measurements:
The Company defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses three levels of inputs to measure fair value:
| ● | Level 1 – quoted prices in active markets for identical assets and liabilities. |
| ● | Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities. |
| ● | Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions. |
Due to their nature, the carrying value of cash equivalents, receivables, payables and debt obligations approximates fair value.
5. Investment in Leasing Operations:
In May 2021, the Company made the decision to no longer solicit new leasing customers and will pursue an orderly run-off for its leasing portfolio.
Leasing income as presented on the Consolidated Condensed Statements of Operations consists of the following:
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | ||||||||||
| September 28, 2024 |
| September 30, 2023 |
| September 28, 2024 |
| September 30, 2023 | ||||||
Interest income on direct financing and sales-type leases | $ | | $ | | $ | | $ | | |||||
Selling profit (loss) at commencement of sales-type leases |
| — |
| |
| — |
| | |||||
Operating lease income | | | | | |||||||||
Income on sales of equipment under lease | | | | | |||||||||
Other | | | | | |||||||||
Leasing income | $ | | $ | | $ | | $ | | |||||
6. Intangible Assets
Intangible assets consist of reacquired franchise rights. The Company amortizes the fair value of the reacquired franchise rights over the contract term of the franchise. The Company recognized $
The following table illustrates future amortization to be expensed for the remainder of 2024 and full fiscal years thereafter related to reacquired franchise rights as of September 28, 2024.
Amortization expected to be expensed in | Amount | ||
2024 | $ | | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 |
| | |
Thereafter |
| | |
$ | | ||
8
7. Earnings Per Share:
The following table sets forth the presentation of shares outstanding used in the calculation of basic and diluted earnings per share (“EPS”):
Three Months Ended | Nine Months Ended | |||||||
| September 28, 2024 |
| September 30, 2023 |
| September 28, 2024 |
| September 30, 2023 | |
Denominator for basic EPS — weighted average common shares |
| |
| |
| |
| |
Dilutive shares associated with option plans |
| |
| |
| |
| |
Denominator for diluted EPS — weighted average common shares and dilutive potential common shares |
| |
| |
| |
| |
Options excluded from EPS calculation — anti-dilutive |
| |
| |
| |
| |
8. Shareholders’ Equity (Deficit):
Dividends
On
On
On
Repurchase of Common Stock
During the first nine months of 2024, the Company did not repurchase any shares of its common stock. Under the Board of Directors’ authorization, as of September 28, 2024, the Company has the ability to repurchase an additional
Stock Option Plans and Stock-Based Compensation
Stock option activity under the Company’s option plans as of September 28, 2024 was as follows:
|
|
| Weighted Average |
| ||||||
Remaining | ||||||||||
Number of | Weighted Average | Contractual Life | ||||||||
| Shares |
| Exercise Price |
| (years) |
|
| Intrinsic Value | ||
Outstanding, December 30, 2023 |
| | $ | | $ | | ||||
Granted |
| | | |||||||
Exercised |
| ( | | |||||||
Forfeited |
| ( | | |||||||
Outstanding, September 28, 2024 |
| | $ | | $ | | ||||
Exercisable, September 28, 2024 |
| | $ | | $ | | ||||
The fair value of options granted under the Option Plans during the first nine months of 2024 and 2023 were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions and results:
9
Nine Months Ended | Nine Months Ended | |||||||
| September 28, 2024 | September 30, 2023 |
| |||||
Risk free interest rate |
| % | % |
| ||||
Expected life (years) |
|
| ||||||
Expected volatility |
| % | % |
| ||||
Dividend yield |
| | % | | % |
| ||
Option fair value | $ | $ | ||||||
All unexercised options at September 28, 2024 have an exercise price equal to the fair market value on the date of the grant.
Compensation expense of $
9. Debt:
Line of Credit/Term Loan
As of September 28, 2024, there were
The Line of Credit has been and will continue to be used for general corporate purposes. The Line of Credit is secured by a lien against substantially all of the Company’s assets, (as the Line of Credit ranks pari passu with the Prudential facilities described below) contains customary financial conditions and covenants, and requires maintenance of minimum levels of debt service coverage and maximum levels of leverage (all as defined within the Line of Credit). As of September 28, 2024, the Company was in compliance with all of its financial covenants.
Notes Payable
As of September 28, 2024, the Company had aggregate principal outstanding of $
The final maturity of the and Series B notes is
The Company’s obligations under the Note Agreement are secured by a lien against substantially all of the Company’s assets (as the notes rank pari passu with the Line of Credit), and the Note Agreement contains customary financial conditions and covenants, and requires maintenance of minimum levels of debt service coverage and maximum levels of leverage (all as defined within the Note Agreement). As of September 28, 2024, the Company was in compliance with all of its financial covenants.
In connection with the Note Agreement, the Company incurred debt issuance costs, of which unamortized amounts are presented as a direct deduction from the carrying amount of the related liability.
10
In April 2022, the Company entered into a Private Shelf Agreement (the “Shelf Agreement”) with Prudential, summarized as follows:
| ● | For a period |
| ● | Each Shelf Note issued will have an average life and maturity of no more than |
| ● | The Shelf Notes will be secured by all of the Company’s assets and the Shelf Notes will rank pari passu with the Company’s obligations to the lenders under the Line of Credit and the Note Agreement; |
| ● | The Shelf Notes may be prepaid, at the option of the Company, in whole or in part (in a minimum amount of $ |
| ● | The Shelf Agreement contains customary affirmative covenants and negative covenants that are substantially the same as those contained in the Line of Credit and Note Agreement. |
As of September 28, 2024, the Company had not issued any notes under the Shelf Agreement and was in compliance with all of its financial covenants.
10. Operating Leases:
As of September 28, 2024, the Company leases its Minnesota corporate headquarters in a facility with an operating lease that expires in December 2029. The remaining lease term for this lease is
Maturities of operating lease liabilities is as follows for the remainder of fiscal 2024 and full fiscal years thereafter as of September 28, 2024:
Operating Lease Liabilities expected to be recognized in |
| Amount | |
2024 | $ | | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 |
| | |
Thereafter |
| | |
Total lease payments | | ||
Less imputed interest | ( | ||
Present value of lease liabilities | $ | | |
Of the $
Supplemental cash flow information related to our operating leases is as follows for the period ended September 28, 2024:
Nine Months Ended | ||||||
| September 28, 2024 |
| September 30, 2023 | |||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||
Operating cash flow outflow from operating leases | $ | | $ | | ||
11
11. Segment Reporting:
The Company currently has
Three Months Ended | Nine Months Ended | |||||||||||
| September 28, 2024 |
| September 30, 2023 |
| September 28, 2024 |
| September 30, 2023 | |||||
Revenue: | ||||||||||||
Franchising | $ | | $ | | $ | | $ | | ||||
Other |
| |
| |
| |
| | ||||
Total revenue | $ | | $ | | $ | | $ | | ||||
Reconciliation to operating income: | ||||||||||||
Franchising segment contribution | $ | | $ | $ | | $ | ||||||
Other operating segment contribution |
| |
|
| |
| ||||||
Total operating income | $ | | $ | | $ | | $ | | ||||
12. Subsequent Events:
On
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Winmark – the Resale Company is focused on sustainability and small business formation. As of September 28, 2024, we had 1,343 franchises operating under the Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round brands. Our business is not capital intensive and is designed to generate consistent, recurring revenue and strong operating margins.
The financial criteria that management closely tracks to evaluate current business operations and future prospects include royalties and selling, general and administrative expenses.
Our most significant source of franchising revenue is royalties received from our franchisees. During the first nine months of 2024, our royalties increased $1.5 million or 2.8% compared to the first nine months of 2023.
Management continually monitors the level and timing of selling, general and administrative expenses. The major components of selling, general and administrative expenses include salaries, wages and benefits, advertising, conferences, travel, occupancy, legal and professional fees. During the first nine months of 2024, selling, general and administrative expenses increased $0.3 million, or 1.5% compared to the first nine months of 2023.
12
Management also monitors several nonfinancial factors in evaluating the current business operations and future prospects including franchise openings and closings and franchise renewals. The following is a summary of our net store growth and renewal activity for the first nine months ended September 28, 2024:
AVAILABLE | |||||||||||||||
TOTAL | TOTAL | FOR | COMPLETED |
| |||||||||||
| 12/30/2023 |
| OPENED |
| CLOSED |
| 9/28/2024 |
| RENEWAL |
| RENEWALS |
| % RENEWED |
| |
Plato’s Closet |
| 506 |
| 11 |
| (2) |
| 515 | 39 | 39 | 100 | % | |||
Once Upon A Child |
| 416 |
| 11 |
| (2) |
| 425 | 40 | 39 | 98 | % | |||
Play It Again Sports |
| 294 |
| 11 |
| (4) | 301 | 18 | 17 | 94 | % | ||||
Style Encore |
| 66 |
| 3 |
| (1) |
| 68 | 10 | 10 | 100 | % | |||
Music Go Round |
| 37 |
| — |
| (3) |
| 34 | 2 | 1 | 50 | % | |||
Total Franchised Stores |
| 1,319 |
| 36 |
| (12) |
| 1,343 |
| 109 | 106 |
| 97 | % |
Renewal activity is a key focus area for management. Our franchisees sign 10-year agreements with us. The renewal of existing franchise agreements as they approach their expiration is an indicator that management monitors to determine the health of our business and the preservation of future royalties. During the first nine months of 2024, we renewed 106 of the 109 franchise agreements available for renewal.
Our ability to grow our operating income is dependent on our ability to: (i) effectively support our franchise partners so that they produce higher revenues, (ii) open new franchises, and (iii) control our selling, general and administrative expenses.
In May 2021, we made the decision to no longer solicit new leasing customers and pursue an orderly run-off of our middle-market leasing portfolio. Leasing income net of leasing expense for the first nine months of 2024 was $1.6 million compared to $3.6 million in the first nine months of 2023. Given the decision to run-off the portfolio, we anticipate that leasing income net of leasing expense will continue to decrease through the run-off period.
Results of Operations
The following table sets forth selected information from our Consolidated Condensed Statements of Operations expressed as a percentage of total revenue:
Three Months Ended | Nine Months Ended | ||||||||
| September 28, 2024 |
| September 30, 2023 |
| September 28, 2024 |
| September 30, 2023 |
| |
|
| ||||||||
Revenue: | |||||||||
Royalties |
| 90.7 | % | 86.1 | % | 88.4 | % | 84.0 | % |
Leasing income |
| 1.5 | 5.8 | 2.7 | 6.2 | ||||
Merchandise sales |
| 3.3 | 4.5 | 4.4 | 5.7 | ||||
Franchise fees |
| 2.1 | 1.5 | 1.9 | 1.8 | ||||
Other |
| 2.4 | 2.1 | 2.6 | 2.3 | ||||
Total revenue |
| 100.0 | 100.0 | 100.0 | 100.0 | ||||
Cost of merchandise sold |
| (3.1) | (4.2) | (4.2) | (5.3) | ||||
Leasing expense |
| — | — | (0.1) | (0.6) | ||||
Provision for credit losses |
| — | — | — | — | ||||
Selling, general and administrative expenses |
| (27.5) | (28.0) | (30.6) | (29.6) | ||||
Income from operations |
| 69.4 | 67.8 | 65.1 | 64.5 | ||||
Interest expense |
| (3.3) | (3.4) | (3.6) | (3.7) | ||||
Interest and other income |
| 1.8 | 1.7 | 1.4 | 1.3 | ||||
Income before income taxes |
| 67.9 | 66.1 | 62.9 | 62.1 | ||||
Provision for income taxes |
| (16.2) | (16.1) | (13.7) | (13.9) | ||||
Net income |
| 51.7 | % | 50.0 | % | 49.2 | % | 48.2 | % |
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Comparison of Three Months Ended September 28, 2024 to Three Months Ended September 30, 2023
Revenue
Revenues for the quarter ended September 28, 2024 totaled $21.5 million compared to $22.3 million for the comparable period in 2023.
Royalties and Franchise Fees
Royalties increased to $19.5 million for the third quarter of 2024 from $19.2 million for the third quarter of 2023, a 1.6% increase. The increase is primarily from having additional franchise stores in the third quarter of 2024 compared to the same period in 2023.
Franchise fees of $0.5 million for the third quarter of 2024 compared to $0.3 million for the third quarter of 2023.
Leasing Income
Leasing income decreased to $0.3 million for the third quarter of 2024 compared to $1.3 million for the same period in 2023. The decrease is primarily due to a decrease in operating lease income when compared to last year.
Merchandise Sales
Merchandise sales include the sale of product to franchisees either through our Computer Support Center or through the Play It Again Sports buying group (together, “Direct Franchisee Sales”). Direct Franchisee Sales decreased to $0.7 million for the third quarter of 2024 compared to $1.0 million in the same period of 2023. The decrease is due to a decrease in buying group and technology purchases by our franchisees.
Cost of Merchandise Sold
Cost of merchandise sold includes in-bound freight and the cost of merchandise associated with Direct Franchisee Sales. Cost of merchandise sold decreased to $0.7 million for the third quarter of 2024 compared to $0.9 million in the same period of 2023. The decrease is due to a decrease in Direct Franchise Sales discussed above. Cost of merchandise sold as a percentage of Direct Franchisee Sales for the third quarter of 2024 and 2023 was 94.3% and 93.7%, respectively.
Selling, General and Administrative
Selling, general and administrative expenses decreased 5.3% to $5.9 million in the third quarter of 2024 compared to $6.2 million in the same period of 2023. The decrease was primarily due to a decrease in compensation related expenses.
Interest Expense
Interest expense decreased to $0.7 million for the third quarter of 2024 compared to $0.8 million for the third quarter of 2023. The decrease is primarily due to lower average borrowing when compared to the same period last year.
Income Taxes
The provision for income taxes was calculated at an effective rate of 23.9% and 24.4% for the third quarter of 2024 and 2023, respectively. The decrease is primarily due to a decrease in state income taxes.
Comparison of Nine Months Ended September 28, 2024 to Nine Months Ended September 30, 2023
Revenue
Revenues for the first nine months of 2024 totaled $61.7 million compared to $63.2 million for the comparable period in 2023.
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Royalties and Franchise Fees
Royalties increased to $54.6 million for the first nine months of 2024 from $53.1 million for the first nine months of 2023, a 2.8% increase. The increase is primarily from having additional franchise stores in the first nine months of 2024 compared to the same period in 2023.
Franchise fees of $1.2 million for the first nine months of 2024 compared to $1.1 million for the first nine months of 2023.
Leasing Income
Leasing income decreased to $1.7 million for the first nine months of 2024 compared to $3.9 million for the same period in 2023. The decrease is primarily due to a decrease in operating lease income and a lower level of equipment sales to customers when compared to the same period last year.
Merchandise Sales
Merchandise sales include the sale of product to franchisees either through our Computer Support Center or through the Play It Again Sports buying group (together, “Direct Franchisee Sales”). Direct Franchisee Sales decreased to $2.7 million for the first nine months of 2024 compared to $3.6 million in the same period of 2023. The decrease is primarily due to a decrease in buying group and technology purchases by our franchisees.
Cost of Merchandise Sold
Cost of merchandise sold includes in-bound freight and the cost of merchandise associated with Direct Franchisee Sales. Cost of merchandise sold decreased to $2.6 million for the first nine months of 2024 compared to $3.4 million in the same period of 2023. The decrease is due to a decrease in Direct Franchise Sales discussed above. Cost of merchandise sold as a percentage of Direct Franchisee Sales for the first six months of 2024 and 2023 was 93.6% and 93.6%, respectively.
Selling, General and Administrative
Selling, general and administrative expenses increased 1.5% to $19.0 million in the first nine months of 2024 compared to $18.7 million in the same period of 2023. The increase was primarily due to an increase in advertising related expenses and outside services.
Interest Expense
Interest expense was $2.2 million for the first nine months of 2024 compared to $2.3 million for the first nine months of 2023. The decrease is primarily due to lower average borrowings when compared to the same period last year.
Income Taxes
The provision for income taxes was calculated at an effective rate of 21.8% and 22.3% for the first nine months of 2024 and 2023, respectively. The decrease is primarily due to higher tax benefits on the exercise of non-qualified stock options and a decrease in state income taxes.
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Segment Comparison of Three Months Ended September 28, 2024 to Three Months Ended September 30, 2023
Franchising Segment Operating Income
The franchising segment’s operating income for the third quarter of 2024 increased to $14.8 million from $14.0 million for the third quarter of 2023. The increase in segment contribution was due to increased royalty revenues and a decrease in selling, general and administrative expenses.
Other Operating Segment Income
The other operating segment income for the third quarter of 2024 decreased to $0.2 million from $1.2 million for the third quarter of 2023. The decrease in segment contribution was due to a decrease in leasing income net of leasing expense.
Segment Comparison of Nine Months Ended September 28, 2024 to Nine Months Ended September 30, 2023
Franchising Segment Income
The franchising segment operating income for the first nine months of 2024 increased to $38.8 million from $37.6 million for the first nine months of 2023. The increase in segment contribution was due to increased royalty revenues, partially offset by an increase in selling, general and administrative expenses.
Other Operating Segment Income
The other operating segment income for the first nine months of 2024 decreased to $1.3 million from $3.2 million for the first nine months of 2023. The decrease in segment contribution was due to a decrease in leasing income net of leasing expenses.
Liquidity and Capital Resources
Our primary sources of liquidity have historically been cash flows from operations and borrowings. The components of the consolidated condensed statements of operations that reduce our net income but do not affect our liquidity include non-cash items for depreciation and amortization and compensation expense related to stock options.
We ended the third quarter of 2024 with $37.3 million in cash, cash equivalents and restricted cash compared to $40.6 million in cash, cash equivalents and restricted cash at the end of the third quarter of 2023.
Operating activities provided $33.7 million of cash during the first nine months of 2024, compared to $35.2 million provided during the same period last year. The decrease in cash provided by operating activities during the first nine months of 2024 compared to 2023 was primarily due to an increase in inventory, cash paid for income taxes and a decrease in principal collections on lease receivables.
Investing activities used $0.2 million of cash during the first nine months of 2024, compared to $0.3 million used during the same period last year. The 2024 activities consisted of the purchase of property and equipment.
Financing activities used $9.6 million of cash during the first nine months of 2024. Our most significant financing activities during the first nine months of 2024 consisted of $9.1 million for the payment of dividends and payments on notes payable of $3.2 million; partially offset by $2.7 million of proceeds from exercise of stock options. (See Note 8 — “Shareholders’ Equity (Deficit),” and Note 9 — “Debt”).
Our debt facilities include a Line of Credit with CIBC Bank USA and a Note Agreement and Shelf Agreement with Prudential. These facilities have been and will continue to be used for general corporate purposes, are secured by a lien against substantially all of our assets, contain customary financial conditions and covenants, and require maintenance of minimum levels of debt service coverage and maximum levels of leverage (all as defined within the agreements governing the facilities). As of September 28, 2024, we were in compliance with all of the financial covenants under the Line of Credit, the Note Agreement and the Shelf Agreement.
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The Line of Credit provides for up to $20.0 million in revolving loans and $30.0 million in delayed draw term loans. As of September 28, 2024, we had no revolving loans outstanding, and had delayed draw term loan borrowings totaling $30.0 million that mature in 2029.
The Shelf Agreement allows us to offer privately negotiated senior notes to Prudential in an aggregate principal amount up to (i) $100.0 million, less (ii) the aggregate principal amount of notes outstanding at such point (including notes outstanding under the Note Agreement, which at September 28, 2024 was $36.0 million). As of September 28, 2024, we had not issued any notes under the Shelf Agreement. Of the $36.0 million of principal outstanding under the Note Agreement, $6.0 million amortizes over the remainder of 2024 through 2027, and $30.0 million matures in 2028.
See Part I, Item 1, Note 9 – “Debt” for more information regarding the Line of Credit, Note Agreement and Shelf Agreement.
We expect to generate the cash necessary to pay our expenses and to pay the principal and interest on our outstanding debt from cash flows provided by operating activities and by opportunistically using other means to repay or refinance our obligations as we determine appropriate. Our ability to pay our expenses and meet our debt service obligations depends on our future performance, which may be affected by financial, business, economic, and other factors including the risk factors described under Item 1A of our Form 10-K for the fiscal year ended December 30, 2023 and under Item 1A below. If we do not have enough money to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or raise equity. In such an event, we may not be able to refinance our debt, sell assets, borrow more money or raise equity on terms acceptable to us or at all. Also, our ability to carry out any of these activities on favorable terms, if at all, may be further impacted by any financial or credit crisis which may limit access to the credit markets and increase our cost of capital.
As of the date of this report we believe that the combination of our cash on hand, the cash generated from our business, our Line of Credit and our Shelf Agreement will be adequate to fund our planned operations through 2025.
Critical Accounting Policies
A discussion of our critical accounting policies is contained in our annual report on Form 10-K for the year ended December 30, 2023. There have been no changes to our critical accounting policies from those disclosed on our Form 10-K for the year ended December 30, 2023.
Forward Looking Statements
The statements contained in this Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not strictly historical fact, including without limitation, the Company’s belief that it will have adequate capital and reserves to meet its current and contingent obligations and operating needs, as well as its disclosures regarding market rate risk are forward looking statements made under the safe harbor provision of the Private Securities Litigation Reform Act. Such statements are based on management’s current expectations as of the date of this Report, but involve risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by such forward looking statements. Investors are cautioned to consider these forward looking statements in light of important factors which may result in material variations between results contemplated by such forward looking statements and actual results and conditions. See the section appearing in our Annual Report on Form 10-K for the fiscal year ended December 30, 2023 entitled “Risk Factors” and Part II, Item 1A in this Report for a more complete discussion of certain factors that may cause the Company’s actual results to differ from those in its forward looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date they were made. The Company undertakes no obligation to revise or update publicly any forward looking statements for any reason.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
The Company incurs financial market risk in the form of interest rate risk. Risk can be quantified by measuring the financial impact of a near-term adverse increase in short-term interest rates. At September 28, 2024, the Company’s Line of Credit with CIBC Bank USA included a commitment for revolving loans of $20.0 million. The interest rates applicable to revolving loans are based on either the bank’s base rate or SOFR for short-term borrowings (twelve months or less). The Company had no revolving loans outstanding at September 28, 2024 under this Line of Credit. The Company had no interest rate derivatives in place at September 28, 2024. The Company’s fixed rate debt exposes the company to changes in the market interest rate only to the extent that the Company may need to refinance maturing debt with new debt at a higher rate.
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None of the Company’s cash and cash equivalents at September 28, 2024 was invested in money market mutual funds, which are subject to the effects of market fluctuations in interest rates.
Foreign currency transaction gains and losses were not material to the Company’s results of operations for the nine months ended September 28, 2024. During fiscal 2023, less than 8% of the Company’s total revenues and 1% of expenses were denominated in a foreign currency. Based upon these revenues and expenses, a 10% increase or decrease in the foreign currency exchange rates would impact annual pretax earnings by approximately $670,000. To date, the Company has not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
ITEM 4: Controls and Procedures
As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of its disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon, and as of the date of that evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There was no change in the Company’s internal control over financial reporting during its most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings
We are not a party to any material litigation and are not aware of any threatened litigation that would have a material adverse effect on our business.
ITEM 1A: Risk Factors
In addition to the other information set forth in this report, including the important information in “Forward-Looking Statements,” you should carefully consider the “Risk Factors” discussed in our Annual Report on Form 10-K for the year ended December 30, 2023. If any of those factors were to occur, they could materially adversely affect our financial condition or future results, and could cause our actual results to differ materially from those expressed in its forward-looking statements in this report. We are aware of no material changes to the Risk Factors discussed in our Annual Report on Form 10-K for the year ended December 30, 2023.
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes the Company’s common stock repurchases during the third quarter of 2024.
Total Number of | Maximum Number |
| ||||||||
Shares Purchased as | of Shares that may |
| ||||||||
Total Number of | Average Price | Part of a Publicly | yet be Purchased |
| ||||||
Period |
| Shares Purchased |
| Paid Per Share |
| Announced Plan(1) |
| Under the Plan |
| |
June 30, 2024 to August 3, 2024 |
| — |
| $ | — |
| — |
| 78,600 | |
August 4, 2024 to August 31, 2024 |
| — |
| $ | — |
| — |
| 78,600 | |
September 1, 2024 to September 28, 2024 |
| — |
| $ | — |
| — |
| 78,600 | |
| (1) | The Board of Directors’ authorization for the repurchase of shares of the Company’s common stock was originally approved in 1995 with no expiration date. The total shares approved for repurchase has been increased by additional Board of Directors’ approvals and as of September 28, 2024 was limited to 5,400,000 shares, of which 78,600 may still be repurchased. |
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ITEM 3: Defaults Upon Senior Securities
None.
ITEM 4: Mine Safety Disclosures
Not applicable.
ITEM 5: Other Information
All
ITEM 6: Exhibits
3.1 |
| Articles of Incorporation, as amended (Exhibit 3.1)(1) |
3.2 | ||
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | |
32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
101 | Interactive Data Files Pursuant to Rule 405 of Regulation S-T: Financial statements from the Quarterly Report on Form 10-Q of Winmark Corporation and Subsidiaries for the quarter ended September 28, 2024, formatted in Inline XBRL: (i) Consolidated Condensed Balance Sheets, (ii) Consolidated Condensed Statements of Operations, (iii) Consolidated Condensed Statements of Shareholders’ Equity (Deficit), (iv) Consolidated Condensed Statements of Cash Flows, and (v) Notes to Consolidated Condensed Financial Statements. | |
104 | The cover page from the Quarterly Report on Form 10-Q of Winmark Corporation and Subsidiaries for the quarter ended September 28, 2024, formatted in Inline XBRL (contained in Exhibit 101). |
*Filed Herewith
| (1) | Incorporated by reference to the specified exhibit to the Registration Statement on Form S-1, effective August 24, 1993 (Reg. No. 333-65108). |
| (2) | Incorporated by reference to the specified exhibit to the Annual Report on Form 10-K for the fiscal year ended December 30, 2006. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WINMARK CORPORATION | ||
Date: October 16, 2024 | By: | /s/ Brett D. Heffes |
Brett D. Heffes Chief Executive Officer | ||
Date: October 16, 2024 | By: | /s/ Anthony D. Ishaug |
Anthony D. Ishaug Executive Vice President |
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