WINMARK CORP (WINA) FY 2025 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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 2025 and 2024 items and year-to-year comparisons between 2025 and 2024. Discussions of 2023 items and year-to-date comparisons between 2024 and 2023 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 28, 2024.
Overview
Winmark – the Resale Company is focused on sustainability and small business formation. As of December 27, 2025, we had 1,378 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 2025, our royalties increased $4.2 million or 5.8% compared to 2024.
Management continually monitors the level and timing of selling, general and administrative expenses. The major components of selling, general and administrative expenses include compensation and benefits, marketing & advertising, professional services, and occupancy. During 2025, selling, general and administrative expense increased $3.4 million, or 13.7%, 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 27, 2025:
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | AVAILABLE | | | | | |
| | | TOTAL | | | | | | TOTAL | | FOR | | COMPLETED | | | |
| | 12/28/2024 | | OPENED | | CLOSED | | 12/27/2025 | | RENEWAL | | RENEWALS | | % RENEWED | | |
| Plato’s Closet | 515 | 18 | (7) | 526 | 42 | 41 | 98 | % | |||||||
| Once Upon A Child | 430 | 17 | (6) | 441 | 44 | | 44 | 100 | % | ||||||
| Play It Again Sports | 302 | 15 | (8) | 309 | 18 | | 17 | 94 | % | ||||||
| Style Encore | 69 | 2 | (4) | 67 | 8 | 8 | 100 | % | |||||||
| Music Go Round | 34 | 3 | (2) | 35 | 4 | 4 | 100 | % | |||||||
| Total Franchised Stores(1) | 1,350 | 55 | (27) | 1,378 | 116 | 114 | 98 | % |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| (1) | All stores are owned and operated by franchisees. Winmark does not own or operate any corporate stores. |
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 2025, we renewed 98% of franchise agreements up for renewal. This percentage of renewal has ranged between 98% and 99% during the last three years.
Our ability to grow our operating income is dependent on our ability to: (i) effectively support our franchisees 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”.
14
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 leasing portfolio. Leasing income net of leasing expense for the fiscal year of 2025 was $2.6 million compared to $1.8 million in 2024. $2.2 million of the $2.5 million of leasing income for the fiscal year of 2025 was related to the settlement of outstanding customer litigation. As of December 27, 2025, the run-off of the portfolio was completed as we no longer had any leasing customers or leased assets. See Note 3 – “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:
| | | | | | | |
|---|---|---|---|---|---|---|
| | Fiscal Year Ended | Fiscal 2025 | | |||
| | December 27, | | December 28, | | over (under) | |
| | 2025 | | 2024 | | 2024 | |
| Revenue: | | | | | | |
| Royalties | 88.7 | % | 88.8 | % | 5.8 | % |
| Leasing income | 3.1 | | 2.2 | | 45.3 | |
| Merchandise sales | 3.8 | | 4.4 | | (8.8) | |
| Franchise fees | 1.8 | | 1.9 | | (1.3) | |
| Other | 2.6 | | 2.7 | | 6.1 | |
| Total revenue | 100.0 | | 100.0 | | 5.9 | |
| | | | | | | |
| Cost of merchandise sold | (3.6) | | (4.2) | | (8.1) | |
| Selling, general and administrative expenses | (33.0) | | (30.7) | | 13.7 | |
| Income from operations | 63.4 | | 65.1 | | 3.1 | |
| Interest expense | (2.8) | | (3.5) | | (14.4) | |
| Interest and other income | 1.1 | | 1.4 | | (14.1) | |
| Income before income taxes | 61.7 | | 63.0 | | 3.7 | |
| Provision for income taxes | (13.3) | | (13.9) | | 0.6 | |
| Net income | 48.4 | % | 49.1 | % | 4.6 | % |
Revenue
Revenues for the year ended December 27, 2025 totaled $86.1 million compared to $81.3 million in 2024.
Royalties and Franchise Fees
Royalties increased to $76.4 million for 2025 from $72.2 million for the same period in 2024, a 5.8% increase. The increase is primarily from higher franchise retail sales and from having additional franchise stores in 2025 compared to 2024.
Franchise fees of $1.5 million for 2025 were comparable to $1.5 million for 2024. 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 increased to $2.6 million in 2025 compared to $1.8 million for the same period in 2024. The increase is primarily due to the settlement of outstanding customer litigation when compared to the same period last year.
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 $3.3 million in 2025 from $3.6 million in 2024. The decrease is due to a decrease in technology purchases by our franchisees.
15
Table of Contents
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 $3.1 million in 2025 from $3.4 million in 2024. 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 2025 and 2024 was 94.6% and 93.8%, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 13.7% to $28.4 million in 2025 from $24.9 million in 2024. The increase was primarily due to an increase in compensation related expenses and a non-recurring expense related to third-party software licenses for franchisees.
Interest Expense
Interest expense was $2.4 million in 2025 compared to $2.9 million in 2024. 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 21.6% and 22.0% for 2025 and 2024, respectively. The decrease is primarily due to higher tax benefits on the exercise of non-qualified stock options.
Segment Comparison of Fiscal Years 2025 and 2024
As of December 27, 2025, 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:
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | Year Ended | |||||
| | | December 27, 2025 | | December 28, 2024 | |||
| Revenue: | | | | | | | |
| Franchising | | $ | 83,423,900 | | $ | 79,477,300 | |
| Other | | 2,631,800 | | 1,811,800 | | ||
| Total revenue | | $ | 86,055,700 | | $ | 81,289,100 | |
| | | | | | | | |
| Reconciliation to income from operations: | | | | | | | |
| Franchising segment contribution | | $ | 52,057,400 | | $ | 51,593,300 | |
| Other operating segment contribution | | 2,536,500 | | 1,337,300 | | ||
| Total income from operations | | $ | 54,593,900 | | $ | 52,930,600 | |
Revenues are all generated from United States operations other than franchising revenue from Canadian operations of $7.8 million and $7.3 million in each of fiscal 2025 and 2024, respectively.
Franchising Segment Operating Income
The franchising segment’s 2025 operating income increased by $0.5 million, or 0.9%, to $52.1 million from $51.6 million for 2024. The increase in segment contribution was primarily due to increased royalty revenues, partially offset by an increase in selling, general, and administrative expenses.
Other Segment Operating Income
The other segment operating income for 2025 increased by $1.2 million, or 89.7%, to $2.5 million from $1.3 million for 2024. The increase in segment contribution was due to the settlement of outstanding customer litigation in the Company’s equipment leasing business.
16
Table of Contents
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 2025 with $10.5 million in cash, cash equivalents and restricted cash compared to $12.3 million in cash, cash equivalents and restricted cash at the end of 2024.
Operating activities provided $44.9 million of cash during 2025 compared to $42.2 million provided during 2024. The increase in cash provided by operating activities in 2025 was due to an increase in net income and a decrease in non-cash working capital.
Investing activities used $0.2 million of cash during 2025 compared to $0.2 million used during 2024.
Financing activities used $46.6 million of cash during 2025 compared to $43.0 million used during 2024. During 2025, we paid $49.1 million in cash dividends (including a $10.00 per share special cash dividend), and paid $2.4 million to repurchase 7,944 shares of our common stock; partially offset by $5.0 million of proceeds from the exercise of stock options. (See Note 6 — “Shareholders’ Equity (Deficit)”.
We have debt obligations and future operating lease commitments for our corporate headquarters. As of December 27, 2025, we had no other material outstanding commitments. (See Note 12 — “Commitments and Contingencies”). The following table summarizes our significant future contractual obligations at December 27, 2025:
| | | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Payments due by period | ||||||||||||||
| | | | | | Less than 1 | | | | | | | | More than 5 | | ||
| | | Total | | year | | 1-3 years | | 3-5 years | | years | ||||||
| Contractual Obligations | | | | | | | | | | | | | | | | |
| Line of Credit/Term loan(1)(3) | | $ | 34,581,900 | | $ | 1,395,500 | | $ | 2,791,000 | | $ | 30,395,400 | | $ | — | |
| Notes Payable(2)(3) | | 32,623,500 | | | 954,000 | | | 31,669,500 | | | — | | | — | | |
| Operating Lease Obligations | | 3,452,600 | | | 828,200 | | | 1,725,700 | | | 898,700 | | | — | | |
| Total Contractual Obligations | | $ | 70,658,000 | | $ | 3,177,700 | | $ | 36,186,200 | | $ | 31,294,100 | | $ | — | |
| Column 1 | Column 2 |
|---|---|
| (1) | Includes interest payable monthly at rates ranging from 4.60% to 4.75%. |
| Column 1 | Column 2 |
|---|---|
| (2) | Includes interest payable quarterly at 3.18%. |