WINMARK CORP

Previous wording

Winmark – the Resale Company is focused on sustainability and small business formation. As of June 29, 2024, we had 1,336 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.

Current wording

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.

Previous wording

Our most significant source of franchising revenue is royalties received from our franchisees. During the first six months of 2024, our royalties increased $1.2 million or 3.5% compared to the first six months of 2023.

Current wording

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.

Previous wording

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 six months of 2024, selling, general and administrative expenses increased $0.6 million, or 4.9% compared to the first six months of 2023.

Current wording

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.

Previous wording

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 six months ended June 29, 2024:

Current wording

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:

Previous wording

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 six months of 2024, we renewed 71 of the 72 franchise agreements available for renewal.

Current wording

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.

Previous wording

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 six months of 2024 was $1.3 million compared to $2.3 million in the first six 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.

Current wording

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.

Previous wording

Revenues for the quarter ended June 29, 2024 totaled $20.1 million compared to $20.4 million for the comparable period in 2023.

Current wording

Revenues for the quarter ended September 28, 2024 totaled $21.5 million compared to $22.3 million for the comparable period in 2023.

Previous wording

Royalties increased to $17.8 million for the second quarter of 2024 from $17.1 million for the second quarter of 2023, a 3.9% increase. The increase is primarily from having additional franchise stores in the second quarter of 2024 compared to the same period in 2023, and to a lesser extent, increases in franchisee retail sales.

Current wording

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.

Previous wording

Leasing income decreased to $0.5 million for the second quarter of 2024 compared to $1.0 million for the same period in 2023. The decrease is primarily due to a decrease in operating lease income when compared to last year.

Current wording

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.

Previous wording

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 $0.9 million for the second quarter of 2024 compared to $1.3 million in the same period of 2023. The decrease is due to a decrease in buying group and technology purchases by our franchisees.

Current wording

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.

Previous wording

Cost of merchandise sold includes in-bound freight and the cost of merchandise associated with Direct Franchisee Sales. Cost of merchandise sold decreased to $0.9 million for the second quarter of 2024 compared to $1.2 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 second quarter of 2024 and 2023 was 93.0% and 94.0%, respectively.

Current wording

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.

Previous wording

Interest expense decreased to $0.7 million for the second quarter of 2024 compared to $0.8 million for the second quarter of 2023. The decrease is primarily due to lower average borrowing when compared to the same period last year.

Current wording

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.

Previous wording

The provision for income taxes was calculated at an effective rate of 17.1% and 18.8% for the second quarter of 2024 and 2023, respectively. The decrease is primarily due to higher benefits on the exercise of non-qualified stock options.

Current wording

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.

Previous wording

Revenues for the first six months of 2024 totaled $40.2 million compared to $40.9 million for the comparable period in 2023.

Current wording

Revenues for the first nine months of 2024 totaled $61.7 million compared to $63.2 million for the comparable period in 2023.

Previous wording

Royalties increased to $35.0 million for the first six months of 2024 from $33.9 million for the first six months of 2023, a 3.5% increase. The increase is primarily from having additional franchise stores in the second quarter of 2024 compared to the same period in 2023, and to a lesser extent, increases in franchisee retail sales.

Current wording

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.

Previous wording

Leasing income decreased to $1.4 million for the first six months of 2024 compared to $2.7 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.

Current wording

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.

Previous wording

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 $2.0 million for the first six months of 2024 compared to $2.6 million in the same period of 2023. The decrease is primarily due to a decrease in buying group and technology purchases by our franchisees.

Current wording

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.

Previous wording

Cost of merchandise sold includes in-bound freight and the cost of merchandise associated with Direct Franchisee Sales. Cost of merchandise sold decreased to $1.9 million for the first six months of 2024 compared to $2.4 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 93.3% and 93.5%, respectively.

Current wording

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.

Previous wording

Selling, general and administrative expenses increased 4.9% to $13.1 million in the first six months of 2024 compared to $12.4 million in the same period of 2023. The increase was primarily due to an increase in advertising related expenses and outside services.

Current wording

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.

Previous wording

Interest expense was $1.5 million for the first six months of 2024 compared to $1.6 million for the first six months of 2023. The decrease is primarily due to lower average borrowings when compared to the same period last year.

Current wording

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.

Previous wording

The provision for income taxes was calculated at an effective rate of 20.6% and 21.1% for the first six months of 2024 and 2023, respectively. The decrease is primarily due to higher tax benefits on the exercise of non-qualified stock options.

Current wording

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.

Previous wording

The franchising segment’s operating income for the second quarter of 2024 increased to $12.6 million from $12.4 million for the second quarter of 2023. The increase in segment contribution was due to increased royalty revenues, partially offset by an increase in selling, general and administrative expenses.

Current wording

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.

Previous wording

The other operating segment income for the second quarter of 2024 decreased to $0.4 million from $0.9 million for the second quarter of 2023. The decrease in segment contribution was due to a decrease in leasing income net of leasing expense.

Current wording

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.

Previous wording

The franchising segment operating income for the first six months of 2024 increased to $24.1 million from $23.6 million for the first six 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.

Current wording

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.

Previous wording

The other operating segment income for the first six months of 2024 decreased to $1.2 million from $2.0 million for the first six months of 2023. The decrease in segment contribution was due to a decrease in leasing income net of leasing expenses.

Current wording

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.

Previous wording

We ended the second quarter of 2024 with $29.4 million in cash, cash equivalents and restricted cash compared to $32.4 million in cash, cash equivalents and restricted cash at the end of the second quarter of 2023.

Current wording

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.

Previous wording

Operating activities provided $21.6 million of cash during the first six months of 2024, compared to $23.2 million provided during the same period last year. The decrease in cash provided by operating activities during the first six months of 2024 compared to 2023 was primarily due to an increase in cash paid for income taxes and a decrease in principal collections on lease receivables.

Current wording

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.

Previous wording

Investing activities used $0.2 million of cash during the first six months of 2024, compared to $0.1 million used during the same period last year. The 2024 activities consisted of the purchase of property and equipment.

Current wording

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.

Previous wording

Financing activities used $5.4 million of cash during the first six months of 2024. Our most significant financing activities during the first six months of 2024 consisted of $6.0 million for the payment of dividends and payments on notes payable of $2.1 million; partially offset by $2.7 million of proceeds from exercise of stock options. (See Note 8 — “Shareholders’ Equity (Deficit),” and Note 9 — “Debt”).

Current wording

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”).

Previous wording

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 June 29, 2024 was $37.1 million). As of June 29, 2024, we had not issued any notes under the Shelf Agreement. Of the $37.1 million of principal outstanding under the Note Agreement, $7.1 million amortizes over the remainder of 2024 through 2027, and $30.0 million matures in 2028.

Current wording

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.