10-K: Winmark Corporation 2023 Annual Report: Focus on Franchise Growth and Sustainability

Winmark Corporation's 2023 annual report highlights a focus on franchise growth, sustainability, and a strong financial position despite a decrease in leasing income.

Summary

• Winmark Corporation, a franchisor focused on sustainability and small business formation, reported its 2023 financial results.
• The company operates 1,319 franchises across five brands: Plato's Closet, Once Upon A Child, Play It Again Sports, Style Encore, and Music Go Round.
• System-wide sales reached $1.589 billion in 2023, up from $1.534 billion in 2022.
• Royalties increased to $70.2 million in 2023, a 4.6% increase compared to 2022.
• The company estimates that its stores have extended the lives of over 1.7 billion items since 2010, with 182 million items in 2023 alone.
• Winmark's leasing operations are in a run-off phase, with leasing income decreasing to $4.4 million in 2023 from $6.0 million in 2022.
• Net income for 2023 was $40.2 million, a slight increase from $39.4 million in 2022.
• The company paid $43.7 million in cash dividends in 2023, including a $9.40 per share special dividend.
• Winmark renewed 99% of franchise agreements up for renewal in 2023.

Sentiment

Score: 7

Explanation: The document presents a generally positive outlook with strong franchise performance and a commitment to sustainability. However, the decrease in leasing income and increase in expenses temper the overall sentiment.

Positives

• The company experienced a 4.6% increase in royalty revenue, indicating strong franchise performance.
• Winmark's commitment to sustainability is highlighted by the large number of items diverted from landfills.
• The high franchise renewal rate of 99% demonstrates franchisee satisfaction and business stability.
• The company's strong cash flow from operations provided $44.0 million in 2023.
• Winmark maintains a strong balance sheet with $13.4 million in cash and cash equivalents.
• The company has a history of returning value to shareholders through dividends, including a special dividend in 2023.

Negatives

• Leasing income decreased significantly to $4.4 million in 2023, down from $6.0 million in 2022, due to the run-off of the leasing portfolio.
• Selling, general, and administrative expenses increased by 8.4% to $25.1 million in 2023.
• The company's net investment in leases decreased to $0.1 million at the end of 2023 from $0.3 million at the end of 2022.
• Franchise fees were slightly down at $1.5 million in 2023 compared to $1.6 million in 2022.

Risks

• The company is dependent on franchise renewals, with a significant number of agreements expiring in the next three years.
• Winmark relies on new franchisees to grow revenue, and unfavorable economic conditions could impact franchise openings.
• The company's franchisees are dependent on the supply of used merchandise, which can be unreliable.
• Winmark faces competition from various retailers and online marketplaces.
• The company has debt obligations and is subject to financial covenants.
• The company is subject to data security risks and potential breaches.
• The company's stock price may fluctuate and be volatile.

Future Outlook

The company expects leasing revenues, expenses, contribution, and cash flows to continue to decrease throughout the run-off period of its leasing portfolio. Winmark believes that the combination of its cash on hand, the cash generated from its franchising and leasing businesses, its Line of Credit and its Shelf Agreement will be adequate to fund its planned operations through 2024.

Management Comments

• Management continually monitors the level and timing of selling, general and administrative expenses.
• Management also monitors several nonfinancial factors in evaluating the current business operations and future prospects including franchise openings and closings and franchise renewals.
• Management believes that renewing a significant number of these franchise relationships is important to the success of the Company.

Industry Context

The report highlights Winmark's position as a leader in the circular economy and its focus on sustainability, which aligns with growing consumer interest in environmentally conscious retail practices. The company's resale model also positions it well in the value-oriented retail market.

Comparison to Industry Standards

• Winmark's franchise model is comparable to other franchise businesses in the retail sector, such as those in the food and beverage industry, but with a focus on resale.
• The company's high franchise renewal rate of 99% is a strong indicator of franchisee satisfaction, which is a key metric for franchise businesses.
• Winmark's system-wide sales of $1.589 billion demonstrate a significant market presence, comparable to other large retail franchise systems.
• The company's focus on sustainability and the circular economy is a differentiator compared to traditional retail businesses.
• The company's leasing business run-off is a unique situation, not directly comparable to other retail franchise businesses.

Stakeholder Impact

• Shareholders benefit from the company's strong financial performance and dividend payments.
• Franchisees benefit from the company's support and the strength of its brands.
• Customers benefit from the value-oriented merchandise and sustainable practices.
• Employees benefit from the company's commitment to diversity and inclusion and its compensation programs.

Next Steps

• The company will continue to support its franchise partners to increase their revenues.
• Winmark will focus on opening new franchises.
• The company will continue to control its selling, general and administrative expenses.
• Winmark will continue to monitor the run-off of its leasing portfolio.

Key Dates

Keywords

franchising, resale, sustainability, franchise, royalties, used merchandise, retail, leasing, circular economy, franchise agreements