10-Q: Winmark Corporation Reports Steady Q2 2024 Results with Focus on Franchise Growth and Run-off of Leasing Portfolio

Winmark Corporation's second quarter 2024 results show a slight decrease in overall revenue but an increase in royalty revenue, alongside a continued run-off of their leasing business.

Summary

• Winmark Corporation reported a slight decrease in total revenue for the second quarter of 2024, with $20.1 million compared to $20.4 million in the same period of 2023.
• Royalty revenue increased by 3.9% to $17.8 million, driven by additional franchise stores and increased franchisee sales.
• Leasing income decreased to $0.5 million from $1.0 million in the same quarter of the previous year, as the company continues to run off its leasing portfolio.
• Merchandise sales decreased to $0.9 million from $1.3 million due to lower buying group and technology purchases by franchisees.
• Selling, general, and administrative expenses increased by 7.4% to $6.2 million, primarily due to increased advertising costs.
• Net income for the quarter was $10.4 million, slightly up from $10.3 million in the same period last year.
• For the first six months of 2024, total revenue was $40.2 million, down from $40.9 million in the same period of 2023.
• Royalty revenue for the first six months increased by 3.5% to $35.0 million.
• Leasing income for the first six months decreased to $1.4 million from $2.7 million.
• Net income for the first six months was $19.2 million, slightly down from $19.3 million in the same period last year.
• The company had 1,336 franchises operating as of June 29, 2024, with a 99% renewal rate for franchise agreements.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive. While there is a slight decrease in overall revenue, the company shows strength in its core franchise business with growing royalty revenue and high renewal rates. The run-off of the leasing portfolio is a strategic decision, not a sign of distress. The company is also in compliance with all debt covenants and has a strong cash position.

Positives

• Royalty revenue continues to grow, indicating strength in the franchise business model.
• High franchise renewal rate of 99% demonstrates franchisee satisfaction and business stability.
• The company maintains a strong cash position with $29.4 million in cash and cash equivalents.
• The company is in compliance with all financial covenants under its debt agreements.
• The company has $20 million available for additional borrowings under its line of credit.
• The company has a strong focus on sustainability and small business formation.

Negatives

• Total revenue decreased slightly in both the second quarter and first six months of 2024 compared to the same periods in 2023.
• Leasing income continues to decline as the company runs off its leasing portfolio.
• Merchandise sales decreased due to lower franchisee purchases.
• Selling, general, and administrative expenses increased, primarily due to higher advertising costs.
• Net income for the first six months of 2024 was slightly down compared to the same period last year.

Risks

• The company's ability to grow operating income depends on supporting franchisees, opening new franchises, and controlling expenses.
• The continued run-off of the leasing portfolio will result in decreased leasing income.
• The company's performance is subject to financial, business, and economic factors.
• The company may need to refinance debt, sell assets, borrow more money, or raise equity if cash flow is insufficient.
• The company's ability to carry out these activities may be impacted by financial or credit crises.

Future Outlook

The company expects leasing income to continue to decrease as they run off their leasing portfolio. They believe that the combination of cash on hand, cash generated from the business, their line of credit and shelf agreement will be adequate to fund planned operations through 2025.

Management Comments

• Winmark is focused on sustainability and small business formation.
• Management closely tracks royalties and selling, general and administrative expenses.
• Management monitors franchise openings, closings, and renewals.
• The company's ability to grow operating income depends on supporting franchisees, opening new franchises, and controlling expenses.

Industry Context

Winmark operates in the resale and franchising industry, which is experiencing growth due to increased consumer interest in sustainable and value-oriented retail options. The company's focus on franchise growth aligns with industry trends, while the run-off of the leasing portfolio reflects a strategic shift in their business model.

Comparison to Industry Standards

• Winmark's franchise renewal rate of 99% is very high compared to industry averages, indicating strong franchisee satisfaction.
• Comparable companies in the franchise sector include companies like Domino's Pizza (DPZ) and McDonald's (MCD), which also rely on franchise fees and royalties for revenue.
• Winmark's focus on resale brands like Plato's Closet and Once Upon A Child differentiates it from traditional franchise models, aligning with the growing trend of sustainable consumption.
• The company's decision to run off its leasing portfolio is a strategic move that may impact its revenue mix compared to companies with diversified financial services.

Corporate Governance

Legal Proceedings

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

Stakeholder Impact

• Shareholders will receive quarterly dividends and benefit from the company's focus on franchise growth.
• Franchisees will benefit from the company's support and the strength of the franchise brands.
• Employees will be impacted by the company's overall performance and strategic decisions.
• Creditors will be impacted by the company's ability to meet its debt obligations.

Next Steps

• The company will continue to focus on supporting its franchise partners.
• The company will continue to manage the run-off of its leasing portfolio.
• The company will continue to monitor and control selling, general and administrative expenses.
• The company will continue to evaluate opportunities to repay or refinance debt.

Key Dates

Keywords

franchise, royalties, leasing, revenue, net income, franchise renewal, operating income, stock options, debt, cash flow