# WINMARK CORP (WINA) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from WINMARK CORP's 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/908315/000090831525000010/wina-20241228x10k.htm Accession: 0000908315-25-000010 Filing date: 2025-02-26 Report date: 2024-12-28 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/WINA/ All MD&A years: /company/WINA/mda/ Previous year: /company/WINA/mda/fy2023/ (FY 2023) Next year: /company/WINA/mda/fy2025/ (FY 2025) ITEM 7:     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ​ The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements and should be read in conjunction with those consolidated financial statements. This section of this 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-date comparisons between 2023 and 2022 that are not included in this Form 10-K, can be found in ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’ in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 30, 2023. ​ Overview ​ Winmark – the Resale Company is focused on sustainability and small business formation. As of December 28, 2024, we had 1,350 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. ​ The financial criteria that management closely tracks to evaluate current business operations and future prospects include royalties and selling, general and administrative expenses. ​ Our most significant source of franchising revenue is royalties received from our franchisees. During 2024, our royalties increased $2.0 million or 2.8% compared to 2023. ​ Management continually monitors the level and timing of selling, general and administrative expenses. The major components of selling, general and administrative expenses include compensation & benefits, marketing & advertising, professional services, and occupancy. During 2024, selling, general and administrative expense decreased $0.2 million, or 0.7%, compared to the same period last year. ​ 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 fiscal year ended December 28, 2024: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","AVAILABLE","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","TOTAL","\u200b","\u200b","\u200b","\u200b","\u200b","TOTAL","\u200b","FOR","\u200b","COMPLETED","\u200b","\u200b"],["\u200b","","12/30/2023","\u200b","OPENED","\u200b","CLOSED","\u200b","12/28/2024","","RENEWAL","\u200b","RENEWALS","\u200b","% RENEWED","\u200b"],["Plato\u2019s Closet","","506","","14","","(5)","","515","","55","","55","","100","%"],["Once Upon A Child","","416","","16","","(2)","","430","","51","\u200b","50","","98","%"],["Play It Again Sports","","294","","13","","(5)","","302","","22","\u200b","21","","95","%"],["Style Encore","","66","","4","","(1)","","69","","15","","15","","100","%"],["Music Go Round","","37","","\u2014","","(3)","","34","","2","","1","","50","%"],["Total Franchised Stores(1)","","1,319","","47","","(16)","","1,350","","145","","142","","98","%"]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["","(1)","All stores are owned and operated by franchisees. Winmark does not own or operate any corporate stores."]] [[/GREPCENT_TABLE]] ​ 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. In 2024, we renewed 98% of franchise agreements up for renewal. This percentage of renewal has ranged between 98% and 100% during the last three years. ​ 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. A detailed description of the risks to our business along with other risk factors can be found in Item 1A “Risk Factors”. ​ 13 Table of Contents In May 2021, we made the decision to no longer solicit new leasing customers and will pursue an orderly run-off of our middle-market leasing portfolio. Leasing income net of leasing expense for the fiscal year of 2024 was $1.8 million compared to $4.4 million in 2023. Our leasing portfolio (net investment in leases), was $0.0 million at December 28, 2024 compared to $0.1 million at December 30, 2023. Given the decision to run-off the portfolio, we anticipate that leasing income net of leasing expense will continue to decrease through the remainder of the run-off period. See Note 3 – “Investment in Leasing Operations” for information regarding the lease portfolio. ​ Results of Operations ​ The following table sets forth selected information from our Consolidated Statements of Operations expressed as a percentage of total revenue and the percentage change in the dollar amounts from the prior period: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","Fiscal Year Ended","Fiscal 2024","\u200b"],["\u200b","December 28,","\u200b","December 30,","\u200b","over (under)","\u200b"],["\u200b","2024","","2023","","2023"],["Revenue:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Royalties","88.8","%","84.4","%","2.8","%"],["Leasing income","2.2","\u200b","5.7","\u200b","(62.0)","\u200b"],["Merchandise sales","4.4","\u200b","5.7","\u200b","(24.4)","\u200b"],["Franchise fees","1.9","\u200b","1.8","\u200b","2.2","\u200b"],["Other","2.7","\u200b","2.4","\u200b","8.0","\u200b"],["Total revenue","100.0","\u200b","100.0","\u200b","(2.3)","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Cost of merchandise sold","(4.2)","\u200b","(5.3)","\u200b","(24.3)","\u200b"],["Leasing expense","\u2014","\u200b","(0.5)","\u200b","(90.8)","\u200b"],["Provision for credit losses","\u2014","\u200b","\u2014","\u200b","(72.7)","\u200b"],["Selling, general and administrative expenses","(30.7)","\u200b","(30.2)","\u200b","(0.7)","\u200b"],["Income from operations","65.1","\u200b","64.0","\u200b","(0.7)","\u200b"],["Interest expense","(3.5)","\u200b","(3.7)","\u200b","(7.6)","\u200b"],["Interest and other income","1.4","\u200b","1.4","\u200b","(1.8)","\u200b"],["Income before income taxes","63.0","\u200b","61.7","\u200b","(0.3)","\u200b"],["Provision for income taxes","(13.9)","\u200b","(13.4)","\u200b","0.8","\u200b"],["Net income","49.1","%","48.3","%","(0.6)","%"]] [[/GREPCENT_TABLE]] ​ Revenue ​ Revenues for the year ended December 28, 2024 totaled $81.3 million compared to $83.2 million in 2023. ​ Royalties and Franchise Fees ​ Royalties increased to $72.2 million for 2024 from $70.2 million for the same period in 2023, a 2.8% increase. The increase is primarily due to having additional franchise stores in 2024 compared to 2023. ​ Franchise fees of $1.5 million for 2024 were comparable to $1.5 million for 2023. Franchise fees include initial franchise fees from the sale of new franchises and transfer fees related to the transfer of existing franchises. Franchise fee revenue is recognized over the estimated life of the franchise, beginning when the franchise opens. An overview of retail brand franchise fees is presented in the Operations subsection of the Business section (Item 1). ​ Leasing Income ​ Leasing income decreased to $1.8 million in 2024 compared to $4.8 million for the same period in 2023. The decrease is primarily due to a decrease in operating lease income and income on sales of equipment under lease resulting from the run off of the portfolio. ​ 14 Table of Contents ​ Merchandise Sales ​ 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 $3.6 million in 2024 from $4.8 million in 2023. The decrease is due to a decrease in buying group and technology purchases by our franchisees. ​ Cost of Merchandise Sold ​ Cost of merchandise sold includes in-bound freight and the cost of merchandise associated with Direct Franchisee Sales. Cost of merchandise sold decreased to $3.4 million in 2024 from $4.5 million in 2023. The decrease was due to a decrease in Direct Franchisee Sales discussed above. Cost of merchandise sold as a percentage of Direct Franchisee Sales for 2024 and 2023 was 93.8% and 93.7%, respectively. ​ Selling, General and Administrative Expenses ​ Selling, general and administrative expenses decreased 0.7% to $24.9 million in 2024 from $25.1 million in 2023. The decrease was primarily due to a decrease in compensation related expenses. ​ Interest Expense ​ Interest expense was $2.9 million in 2024 compared to $3.1 million in 2023. The decrease is primarily due to lower average corporate borrowings when compared to last year. ​ Income Taxes ​ The provision for income taxes was calculated at an effective rate of 22.0% and 21.8% for 2024 and 2023, respectively. The increase is primarily due to an increase in the valuation allowance related to foreign tax credits. ​ Segment Comparison of Fiscal Years 2024 and 2023 ​ As of December 28, 2024, we have one reportable operating segment, franchising, and one non-reportable operating segment. The franchising segment franchises value-oriented retail store concepts that buy, sell and trade merchandise. The non-reportable operating segment includes our equipment leasing business. Segment reporting is intended to give financial statement users a better view of how we manage and evaluate our businesses. Our internal management reporting is the basis for the information disclosed for our operating segments. The following tables summarize financial information by segment and provide a reconciliation of segment contribution to income from operations: [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended"],["\u200b","","December 28, 2024","","December 30, 2023"],["Revenue:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Franchising","\u200b","$","79,477,300","\u200b","$","78,477,300","\u200b"],["Other","\u200b","","1,811,800","\u200b","","4,766,200","\u200b"],["Total revenue","\u200b","$","81,289,100","\u200b","$","83,243,500","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Reconciliation to income from operations:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Franchising segment contribution","\u200b","$","51,593,300","\u200b","$","49,375,900","\u200b"],["Other operating segment contribution","\u200b","","1,337,300","\u200b","","3,904,700","\u200b"],["Total income from operations","\u200b","$","52,930,600","\u200b","$","53,280,600","\u200b"]] [[/GREPCENT_TABLE]] ​ Revenues are all generated from United States operations other than franchising revenue from Canadian operations of $7.3 million and $6.8 million in each of fiscal 2024 and 2023, respectively. ​ 15 Table of Contents Franchising Segment Operating Income ​ The franchising segment’s 2024 operating income increased by $2.2 million, or 4.5%, to $51.6 million from $49.4 million for 2023. The increase in segment contribution was primarily due to increased royalty revenues. ​ Other Segment Operating Income ​ The other segment operating income for 2024 decreased by $2.6 million, or 65.8%, to $1.3 million from $3.9 million for 2023. The decrease in segment contribution was due to a decrease in leasing income net of leasing expense. ​ Liquidity and Capital Resources ​ Our primary sources of liquidity have historically been cash flow from operations and borrowings. The components of the Consolidated Statements of Operations that reduce our net income but do not affect our liquidity include non-cash items for depreciation and amortization and compensation expense related to stock options. ​ We ended 2024 with $12.3 million in cash, cash equivalents and restricted cash compared to $13.4 million in cash, cash equivalents and restricted cash at the end of 2023. ​ Operating activities provided $42.2 million of cash during 2024 compared to $44.0 million provided during 2023. The decrease in cash provided by operating activities in 2024 was due to a decrease in accrued and other liabilities. ​ Investing activities used $0.2 million of cash during 2024 compared to $0.4 million used during 2023. ​ Financing activities used $43.0 million of cash during 2024 compared to $43.9 million used during 2023. Our most significant financing activities over the past two years have consisted of payments on our notes payable, the payment of dividends, and net proceeds received from the exercise of stock options. During 2024, we paid $38.9 million in cash dividends (including a $7.50 per share special cash dividend), and paid $9.2 million on notes payable (including $4.9 million in prepayment of notes that had scheduled amortization payments due in 2025-2027); partially offset by $5.0 million of proceeds from the exercise of stock options. (See Note 6 — “Shareholders’ Equity (Deficit)” and Note 7 — “Debt”). ​ We have debt obligations and future operating lease commitments for our corporate headquarters. As of December 28, 2024, we had no other material outstanding commitments. (See Note 12 — “Commitments and Contingencies”). The following table summarizes our significant future contractual obligations at December 28, 2024: ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Payments due by period"],["\u200b","\u200b","\u200b","\u200b","\u200b","Less than 1","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","More than 5","\u200b"],["\u200b","","Total","","year","","1-3 years","","3-5 years","","years"],["Contractual Obligations","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Line of Credit/Term loan(1)(3)","\u200b","$","35,977,400","\u200b","$","1,395,500","\u200b","$","2,791,000","\u200b","$","31,790,900","\u200b","$","\u2014","\u200b"],["Notes Payable(2)(3)","\u200b","","33,577,500","\u200b","\u200b","954,000","\u200b","\u200b","1,908,000","\u200b","\u200b","30,715,500","\u200b","\u200b","\u2014","\u200b"],["Operating Lease Obligations","\u200b","","4,258,600","\u200b","\u200b","806,000","\u200b","\u200b","1,679,300","\u200b","\u200b","1,773,300","\u200b","\u200b","\u2014","\u200b"],["Total Contractual Obligations","\u200b","$","73,813,500","\u200b","$","3,155,500","\u200b","$","6,378,300","\u200b","$","64,279,700","\u200b","$","\u2014","\u200b"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Includes interest payable monthly at rates ranging from 4.60% to 4.75%."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(2)","Includes interest payable quarterly at 3.18%."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]]