10-K: Winmark Corporation Reports Steady Franchise Growth in 2024 Annual Filing

Winmark Corporation's 2024 10-K filing reveals a focus on franchise growth and sustainability within the resale market.

Summary

• Winmark Corporation, a franchisor focused on sustainability and small business formation, reported its annual results for the fiscal year ended December 28, 2024.
• The company franchises five resale brands: Platos Closet, Once Upon A Child, Play It Again Sports, Style Encore, and Music Go Round, with 1,350 franchises in operation across the United States and Canada.
• System-wide sales reached $1.61 billion in 2024, up from $1.59 billion in 2023.
• Royalties increased to $72.2 million, a 2.8% increase compared to the previous year, primarily due to additional franchise stores.
• The company renewed 98% of franchise agreements up for renewal in 2024.
• Winmark is running off its middle-market leasing portfolio, with leasing income decreasing to $1.8 million in 2024 from $4.8 million in 2023.
• The company paid $38.9 million in cash dividends, including a $7.50 per share special cash dividend, and $9.2 million on notes payable.
• Winmark believes its cash on hand, cash generated from business operations, line of credit, and shelf agreement will adequately fund planned operations through 2025.

Sentiment

Score: 7

Explanation: The document presents a stable and growing franchise business with a commitment to sustainability. While leasing income is declining, the core franchising business is performing well, and the company is financially stable.

Positives

• The company experienced growth in system-wide sales and royalties, indicating healthy franchise performance.
• High franchise renewal rate of 98% demonstrates franchisee satisfaction and business stability.
• Winmark's commitment to sustainability is highlighted, with over 185 million items kept out of landfills in 2024.
• The company maintains a strong emphasis on employee welfare, diversity, and inclusion.
• Winmark is in compliance with all financial covenants under its line of credit, note agreement, and shelf agreement.

Negatives

• Leasing income decreased significantly due to the run-off of the middle-market leasing portfolio.
• Merchandise sales decreased due to lower buying group and technology purchases by franchisees.
• The company faces competition from various retailers and online marketplaces.
• Winmark is subject to government regulation and potential claims related to labor and employment laws.
• The company is exposed to potential data security risks.

Risks

• Pandemics, epidemics, or other public health emergencies could adversely affect the business.
• The company is dependent on franchise renewals and new franchisees for revenue growth.
• Investments outside of core businesses may not be successful.
• Franchisees are dependent on the supply of used merchandise, which may not be regular or reliable.
• The company may be unable to collect accounts receivable from franchisees.
• Winmark is subject to restrictions in its line of credit/term loan and note facilities.
• The company may be unable to protect against data security risks.

Future Outlook

Winmark expects to generate the cash necessary to pay expenses and debt obligations from operating activities and potentially refinance obligations. The company believes its cash on hand, cash generated from business operations, line of credit, and shelf agreement will adequately fund planned operations through 2025.

Management Comments

• Management continually monitors the level and timing of selling, general and administrative expenses.
• Renewal activity is a key focus area for management.
• 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.

Industry Context

Winmark operates in the competitive retail and franchising industries, facing competition from established retailers, discount chains, and online marketplaces. The company's focus on value-oriented merchandise and sustainability positions it uniquely within the resale market.

Comparison to Industry Standards

• Comparable companies in the retail and franchising space include companies such as Dicks Sporting Goods, Guitar Center, and childrens retailers like Carters and Gap Kids.
• Winmark's franchise model is similar to other franchise businesses like McDonalds or Subway, where the company earns revenue through franchise fees and royalties.
• The company's commitment to sustainability aligns with broader industry trends towards environmentally conscious business practices, similar to companies like Patagonia or Eileen Fisher.

Legal Proceedings

• The company is not a party to any material litigation and is not aware of any threatened litigation that it believes would have a material adverse effect on its business.

Stakeholder Impact

• Shareholders: The company's financial performance and dividend payments impact shareholder value.
• Franchisees: The company's support and brand recognition affect franchisee success.
• Employees: The company's commitment to employee welfare and diversity impacts employee satisfaction and retention.
• Customers: The company's resale model provides value and sustainability options for customers.

Next Steps

• Continue to support franchise partners to increase revenue.
• Focus on opening new franchises.
• Control selling, general, and administrative expenses.
• Monitor and manage the run-off of the middle-market leasing portfolio.

Key Dates