Part 1: Analysis of Performance
Winmark Corp operates through its franchising business, selling second-hand clothes and equipment to its customers under brand names such as Plato’s Closet and Once Upon A Child. During 2022, Winmark Corp's royalties increased $6.4 million or 10.5% compared to 2021, which shows an increase in the royalty revenue earned from their franchisees. However, selling, general and administrative expenses increased by $0.9 million, leading to a 3.9% rise in the same period compared to 2021. Despite this, the renewal rate for franchise agreements remained between 99% and 100% during the past three years, indicating the soundness of their business model. Over the last fiscal year, Winmark Corp's net income increased by 1.4% to $29.4 million, resulting in earnings per share of $7.39.
Moreover, during May 2021, Winmark Corp made a decision to run-off their middle-market leasing portfolio, the operations of which constituted the leasing segment. The company hopes to pursue an orderly run-off of this segment. Given this decision to run-off the leasing portfolio, the leasing income net of leasing expense and the size of the leasing portfolio will likely continue to decrease through the run-off period, leading to a decrease in operating income.
Part 2: Forward Looking Analysis
Winmark Corp should continue to benefit from the trend of sustainability and second-hand buying, which consumers are increasingly embracing. Winmark Corp's consistent and recurring business model generates strong operating margins, which should present opportunities to control selling, general and administrative expenses further, leading to a steady increase in revenue. Continued support of the franchise partners through effective sales and marketing strategies, as well as opening new franchises, will remain a key driver of growth for the firm. Furthermore, the renewal of franchise agreements is critical to maintaining the number of franchises in operation and future royalty revenue.
In terms of risks, the company must focus on potential consumer behavior changes, shifts in fashion trends, and external factors of competition in the second-hand selling market. In May 2021, the decision to run-off the leasing portfolio has been taken, which may impact the company's revenue negatively in the future. Despite this, the financial position of the firm remains strong, with a strong balance sheet and a debt-free status. The company continues to achieve impressive returns on equity, with a return on equity at 114.8%, indicating the efficient use of shareholder funds.
Overall, based on Winmark Corp's sound business model, continued expansion, and positive financial performance, the company remains a good investment for potential investors.