10-Q: Winmark Reports Strong Q3, Declares $10 Special Dividend

Winmark Corporation announced robust financial results for the third quarter and first nine months of 2025, highlighted by increased royalties, net income growth, and a significant special cash dividend.

Summary

• Total revenue for the three months ended September 27, 2025, increased by 5.2% to $22.6 million, up from $21.5 million in the prior year period.
• Royalties, the primary revenue source, grew by 7.2% to $20.9 million for the third quarter of 2025, driven by higher franchise retail sales and more franchise stores.
• Net income for the third quarter of 2025 was $11.136 million, a slight increase from $11.120 million in the same period last year.
• For the first nine months of 2025, total revenue rose by 5.3% to $65.0 million, compared to $61.7 million in the first nine months of 2024.
• Nine-month net income increased by 4.4% to $31.694 million, up from $30.371 million in the comparable period of 2024.
• The company reported a net increase of 27 franchised stores, reaching a total of 1,377 stores as of September 27, 2025.
• A 99% franchise renewal rate was achieved, with 89 out of 90 available agreements renewed during the first nine months of 2025.
• The equipment leasing portfolio run-off is substantially complete, with no leasing income anticipated after the fourth quarter of 2025.
• The Board of Directors approved a $10.00 per share special cash dividend, totaling approximately $35.6 million, payable on December 1, 2025.

Sentiment

Score: 8

Explanation: The company demonstrated strong financial performance with increased revenue, net income, and cash flow. The high franchise renewal rate and net store growth indicate a healthy core business. The declaration of a significant special dividend underscores robust liquidity and a commitment to shareholder returns. While SG&A expenses increased, overall profitability improved, and the strategic exit from the leasing business is nearing completion, streamlining operations.

Positives

• Royalties increased by 7.2% for the quarter and 5.1% for the nine months, indicating strong performance in the core franchising business.
• Net income grew by 4.4% for the first nine months of 2025, demonstrating improved profitability.
• Basic EPS increased to $8.94 for the nine months, up from $8.65 in the prior year.
• Diluted EPS increased to $8.61 for the nine months, up from $8.29 in the prior year.
• Cash and cash equivalents significantly increased to $39.7 million as of September 27, 2025, from $12.2 million at December 28, 2024.
• Operating activities provided $36.4 million in cash during the first nine months of 2025, an increase from $33.7 million in the prior year.
• A high franchise renewal rate of 99% (89 of 90) reflects strong franchisee satisfaction and business health.
• The company declared a substantial $10.00 per share special cash dividend, returning significant capital to shareholders.
• The company remains in compliance with all financial covenants under its Line of Credit and Note Agreement.

Negatives

• Selling, general and administrative expenses increased by 19.0% for the quarter and 11.0% for the nine months, primarily due to compensation-related expenses and advertising production timing.
• Leasing income decreased significantly for the quarter due to the nearing completion of the portfolio run-off, though nine-month leasing income increased due to a one-time litigation settlement.
• Merchandise sales decreased for the nine-month period, primarily due to a decrease in technology purchases by franchisees.

Risks

• The company's ability to pay expenses and meet debt service obligations depends on future performance, which may be affected by financial, business, economic, and other factors.
• There is a risk that the company may not be able to refinance debt, sell assets, borrow more money, or raise equity on acceptable terms if cash flows are insufficient.
• Financial or credit crises could limit access to credit markets and increase the cost of capital.
• The company is exposed to interest rate risk, particularly if it needs to refinance maturing fixed-rate debt at higher rates.
• Foreign currency exchange rate fluctuations could impact annual pretax earnings, with a 10% change potentially affecting earnings by approximately $730,000.

Future Outlook

The company anticipates no leasing income after the fourth quarter of 2025 as the leasing portfolio run-off is substantially complete. Management believes that the combination of cash on hand, cash generated from business operations, and the available Line of Credit will be adequate to fund planned operations through 2026. The company is currently evaluating the impact of new FASB guidance on income statement expenses (effective after December 15, 2026) and income tax disclosures (effective after December 15, 2024) on its financial statements.

Management Comments

• Winmark – the Resale Company is focused on sustainability and small business formation.
• Our business is not capital intensive and is designed to generate consistent, recurring revenue and strong operating margins.
• 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.
• The run-off of our leasing portfolio is now substantially complete and we anticipate that we will have no leasing income to recognize after the fourth quarter of 2025.
• As of the date of this report we believe that the combination of our cash on hand, the cash generated from our business and our Line of Credit will be adequate to fund our planned operations through 2026.

Industry Context

Winmark operates in the growing resale and franchising sectors, which benefit from increasing consumer demand for sustainable and value-oriented shopping, as well as entrepreneurial interest in small business ownership. The company's strong franchise renewal rate and consistent royalty growth suggest a robust and attractive business model within this niche. The strategic decision to complete the run-off of its equipment leasing business allows for a sharper focus on its core, less capital-intensive franchising segment, aligning with broader industry trends towards specialized and efficient business models.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results to assess the company's performance against global industry benchmarks.

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 benefit from the strong financial performance, including increased regular dividends, share repurchases, and a substantial $10.00 per share special cash dividend.
• Franchisees: The high 99% renewal rate indicates continued success and satisfaction with the Winmark franchise model, suggesting a positive impact on their businesses.
• Employees: Increased compensation-related expenses within SG&A suggest potential benefits or investments in the workforce.
• Creditors: The company's compliance with all financial covenants and strong liquidity position enhance confidence for creditors.

Next Steps

• Payment of the $10.00 per share special cash dividend on December 1, 2025.
• Completion of the equipment leasing portfolio run-off, with no leasing income expected after the fourth quarter of 2025.
• Evaluation of the impact of new FASB guidance on income statement expenses (effective after December 15, 2026) and income tax disclosures (effective after December 15, 2024).

Key Dates

Recommendation

Winmark Corporation exhibits robust financial health, marked by consistent revenue and net income growth in its core franchising segment. The significant increase in cash and cash equivalents, coupled with strong operating cash flow, demonstrates excellent liquidity. The declaration of a substantial $10.00 per share special cash dividend, in addition to regular dividends and share repurchases, signals a strong commitment to returning capital to shareholders. The high franchise renewal rate and strategic focus on the profitable franchising business, while phasing out the less core leasing operations, further solidify its market position. Despite an increase in SG&A, the overall financial performance and shareholder-friendly actions make it an attractive investment.

Keywords

Franchising, Resale, Retail, Dividends, Cash Flow, SEC Filing, WIN, Platos Closet, Once Upon A Child, Play It Again Sports, Style Encore, Music Go Round