Quarterly Report for Quarter Ending March 28, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

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Overview

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Winmark - the Resale Company is focused on sustainability and small business formation. As of March 28, 2026, we had 1,383 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.

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The financial criteria that management closely tracks to evaluate current business operations and future prospects include royalties and selling, general and administrative expenses.

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Our most significant source of revenue is royalties received from our franchisees. During the first three months of 2026, our royalties increased $1.5 million or 8.4% compared to the first three months of 2025.

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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 and advertising, professional services, and occupancy. During the first three months of 2026, selling, general and administrative expenses increased $0.4 million, or 5.8% compared to the first three months of 2025.

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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 three months ended March 28, 2026:

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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 three months of 2026, we renewed 23 of the 23 franchise agreements available for renewal.

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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.

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Results of Operations

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The following table sets forth selected information from our Consolidated Condensed Statements of Operations expressed as a percentage of total revenue:

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Comparison of Three Months Ended March 28, 2026 to Three Months Ended March 29, 2025

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Revenue

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Revenues for the quarter ended March 28, 2026 totaled $20.8 million compared to $21.9 million for the comparable period in 2025.

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Royalties and Franchise Fees

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Royalties increased to $19.3 million for the first three months of 2026 from $17.8 million for the first three months of 2025, an 8.4% increase. The increase is primarily from higher franchise retail sales and, to a lesser extent, having additional franchise stores in the first three months of 2026 compared to the same period in 2025.

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Franchise fees of $0.3 million for the first three months of 2026 were comparable to $0.3 million for the first three months of 2025.

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Leasing Income

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Leasing income decreased to $0.0 million for the first quarter of 2026 compared to $2.3 million for the same period in 2025. Leasing income in the first quarter of 2025 reflected the settlement of customer litigation. As of December 27, 2025, the previously announced run-off of the leasing portfolio was completed and we no longer have any leasing customers or leased assets.

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Merchandise Sales

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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 first quarter of 2026 compared to $0.9 million in the same period of 2025. The decrease is due to a decrease in technology and buying group purchases by our franchisees.

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Cost of Merchandise Sold

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Cost of merchandise sold includes in-bound freight and the cost of merchandise associated with Direct Franchisee Sales. Cost of merchandise sold decreased to $0.6 million for the first quarter of 2026 compared to $0.9 million in the same period of 2025. The decrease was due to the decrease in Direct Franchisee Sales discussed above. Cost of merchandise sold as a percentage of Direct Franchisee Sales for the first quarter of 2026 and 2025 was 94.6% and 94.4%, respectively.

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Selling, General and Administrative

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Selling, general and administrative expenses increased 5.8% to $7.9 million in the first quarter of 2026 from $7.4 million in the same period of 2025. The increase was primarily due to an increase in compensation related expenses.

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Income Taxes

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The provision for income taxes was calculated at an effective rate of 22.0% and 24.2% for the first quarter of 2026 and 2025, respectively. The decrease is due to tax benefits on the exercise of non-qualified stock options during the first quarter of 2026.

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Segment Comparison of Three Months Ended March 28, 2026 to Three Months Ended March 29, 2025

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Franchising Segment Operating Income

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The franchising segment's operating income for the first quarter of 2026 of $12.4 million was up from $11.4 million for the first quarter of 2025. The increase in segment contribution was due to an increase in royalty revenue, partially offset by an increase in selling, general and administrative expenses.

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Other Operating Segment Income

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The other operating segment income for the first quarter of 2026 was $0.0 million compared to $2.3 million in the first quarter of 2025. The segment contribution in the first quarter of 2025 reflected the settlement of customer litigation.

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Liquidity and Capital Resources

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Our primary sources of liquidity have historically been cash flow from operations and borrowings. The components of the consolidated condensed 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.

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We ended the first quarter of 2026 with $19.9 million in cash, cash equivalents and restricted cash compared to $22.0 million in cash, cash equivalents and restricted cash at the end of the first quarter of 2025.

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Operating activities provided $11.9 million of cash during the first three months of 2026 compared to $15.1 million provided during the first three months of last year. The decrease in cash provided by operating activities in the first three months of 2026 compared to 2025 was primarily due to an increase in non-cash working capital and a decrease in net income.

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Investing activities used minimal cash during the first three months of 2026. The 2026 activities consisted of the purchase of property and equipment.

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Financing activities used $2.4 million of cash during the first three months of 2026. Our financing activities during the first three months of 2026 consisted of $3.4 million for the payment of dividends; partially offset by $1.0 million of proceeds from the exercise of stock options. (See Note 8 - "Shareholders' Equity (Deficit)).

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As of March 28, 2026, our debt facilities include a Line of Credit with CIBC Bank USA and a Note Agreement with Prudential. These facilities have been and will continue to be used for general corporate purposes, are secured by a lien against substantially all of our assets, contain customary financial conditions and covenants, and require maintenance of minimum levels of debt service coverage and maximum levels of leverage (all as defined within the agreements governing the facilities). As of March 28, 2026, we were in compliance with all of the financial covenants under the Line of Credit and the Note Agreement.

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The Line of Credit provides for up to $20.0 million in revolving loans and $30.0 million in delayed draw term loans. As of March 28, 2026, we had no revolving loans outstanding, and had delayed draw term loan borrowings totaling $30.0 million that mature in 2029.

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See Part I, Item 1, Note 9 - "Debt" for more information regarding the Line of Credit and Note Agreement.

We expect to generate the cash necessary to pay our expenses and to pay the principal and interest on our outstanding debt from cash flows provided by operating activities and by opportunistically using other means to repay or refinance our obligations as we determine appropriate. Our ability to pay our expenses and meet our debt service obligations depends on our future performance, which may be affected by financial, business, economic, and other factors including the risk factors described under Item 1A of our Form 10-K for the fiscal year ended December 27, 2025 and under Item 1A below. If we do not have enough money to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or raise equity. In such an event, we may not be able to refinance our debt, sell assets, borrow more money or raise equity on terms acceptable to us or at all. Also, our ability to carry out any of these activities on favorable terms, if at all, may be further impacted by any financial or credit crisis which may limit access to the credit markets and increase our cost of capital.

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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.

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Critical Accounting Policies

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A discussion of our critical accounting policies is contained in our annual report on Form 10-K for the year ended December 27, 2025. There have been no changes to our critical accounting policies from those disclosed on our Form 10-K for the year ended December 27, 2025.

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Forward Looking Statements

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The statements contained in this Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" that are not strictly historical fact, including without limitation, the Company's belief that it will have adequate capital and reserves to meet its current and contingent obligations and operating needs, as well as its disclosures regarding market rate risk are forward looking statements made under the safe harbor provision of the Private Securities Litigation Reform Act. Such statements are based on management's current expectations as of the date of this Report, but involve risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by such forward looking statements. Investors are cautioned to consider these forward looking statements in light of important factors which may result in material variations between results contemplated by such forward looking statements and actual results and conditions. See the section appearing in our Annual Report on Form 10-K for the fiscal year ended December 27, 2025 entitled "Risk Factors" and Part II, Item 1A in this Report for a more complete discussion of certain factors that may cause the Company's actual results to differ from those in its forward looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date they were made. The Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

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