Quarterly Report for Quarter Ending September 26, 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 September 26, 2026, we had 1,398 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 franchising revenue is royalties received from our franchisees. During the first nine months of 2026, our royalties increased $3.7 million or 6.5% compared to the first nine months of 2025.

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During the three months ended September 26, 2026, the Company implemented the Plato's Closet North American Advertising Fund. Franchisees of Plato's Closet stores contribute 2% of sales to the Ad Fund. Contributions and expenditures are reported on a gross basis in the Consolidated Condensed Statement of Operations within North American advertising fund revenue and North American advertising fund expense, respectively. Contributions to the Ad Fund will be used to generate Plato's Closet specific creative, working media and marketing infrastructure improvements to increase brand visibility. A portion of the Ad Fund proceeds will cover reasonable costs incurred by Winmark for administering the Ad Fund, including investments in personnel or contractors and continued investments in marketing activities.

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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 nine months of 2026, selling, general and administrative expenses increased $1.6 million, or 7.8% compared to the first nine 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 nine months ended September 26, 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 nine months of 2026, we renewed 77 of the 77 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.

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 September 26, 2026 to Three Months Ended September 27, 2025

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Revenue

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Revenues for the quarter ended September 26, 2026 totaled $27.9 million compared to $22.6 million for the comparable period in 2025.

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Royalties and Franchise Fees

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Royalties increased to $21.7 million for the third quarter of 2026 from $20.9 million for the third quarter of 2025, a 3.8% increase. The increase is primarily from higher franchise retail sales, and to a lesser extent, from having additional franchise stores in the third quarter of 2026 compared to the same period in 2025.

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Franchise fees were $0.3 million for the third quarter of 2026 compared to $0.4 million for the third quarter of 2025.

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North American Advertising Fund

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Contributions for the North American Advertising Fund were $3.8 million for the third quarter of 2026. Contributions for the Ad Fund commenced July 1, 2026. There were no contributions in 2025.

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Software

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Software increased to $0.5 million for the third quarter of 2026 from $0.1 million for the third quarter of 2025 primarily due to the introduction of a $295 monthly software fee per store location that commenced on September 1, 2026.

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Leasing Income

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We had no leasing income for the first nine months of 2026 compared to $46,600 for the same period in 2025. 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 increased to $1.0 million for the third quarter of 2026 from $0.7 million in the same period of 2025. The increase is primarily due to an increase in technology purchases by our franchisees.

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North American Advertising Fund Expense

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North American advertising fund expense was $3.8 million for the third quarter of 2026. There were no expenses in 2025.

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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 increased to $0.9 million for the third quarter of 2026 from $0.7 million in the same period of 2025. The increase is due to an increase in Direct Franchise Sales discussed above. Cost of merchandise sold as a percentage of Direct Franchisee Sales for the third quarter of 2026 and 2025 was 91.8% and 95.6%, respectively.

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Selling, General and Administrative

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Selling, general and administrative expenses increased 4.1% to $7.3 million in the third quarter of 2026 compared to $7.0 million in the same period of 2025. The increase was primarily due to an increase in compensation related expenses for the Company's investments in technology and marketing.

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Interest Expense

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Interest expense of $0.6 million for the third quarter of 2026 was comparable to $0.6 million for the third quarter of 2025.

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Income Taxes

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The provision for income taxes was calculated at an effective rate of 23.3% and 23.8% for the third quarter of 2026 and 2025, respectively. The decrease is primarily due to more tax benefits on the exercise of non-qualified stock options during the third quarter of 2026 compared to the third quarter of 2025.

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Comparison of Nine Months Ended September 26, 2026 to Nine Months Ended September 27, 2025

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Revenue

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Revenues for the first nine months of 2026 totaled $70.7 million compared to $65.0 million for the comparable period in 2025.

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Royalties and Franchise Fees

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Royalties increased to $61.1 million for the first nine months of 2026 from $57.3 million for the first nine months of 2025, a 6.5% increase. The increase is primarily from higher franchise retail sales, and to a lesser extent, from having additional franchise stores in the first nine months of 2026 compared to the same period in 2025.

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Franchise fees of $1.1 million for the first nine months of 2026 were comparable to $1.1 million for the first nine months of 2025.

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North American Advertising Fund

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Contributions for the North American Advertising Fund were $3.8 million for the first nine months of 2026. Contributions for the Ad Fund commenced July 1, 2026. There were no contributions in 2025.

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Software

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Software increased to $0.7 million for the first nine months of 2026 from $0.3 million for the first nine months of 2025 primarily due to the introduction of the $295 monthly software fee per store location that commenced on September 1, 2026.

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Leasing Income

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We had no leasing income for the first nine months of 2026 compared to $2.4 million for the same period in 2025. Leasing income in the first nine months 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 increased to $2.5 million for the first nine months of 2026 compared to $2.4 million in the same period of 2025. The increase is primarily due to an increase in technology purchases by our franchisees.

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North American Advertising Fund Expense

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North American advertising fund expense was $3.8 million for the first nine months of 2026. There was no expense in 2025.

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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 increased to $2.4 million for the first nine months of 2026 compared to $2.3 million in the same period of 2025. The increase is due to an increase in Direct Franchise Sales discussed above. Cost of merchandise sold as a percentage of Direct Franchisee Sales for the first nine months of 2026 and 2025 was 93.7% and 95.1%, respectively.

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Selling, General and Administrative

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Selling, general and administrative expenses increased 7.8% to $22.7 million in the first nine months of 2026 compared to $21.1 million in the same period of 2025. The increase was primarily due to an increase in compensation related expenses for the Company's investments in technology and marketing.

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Interest Expense

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Interest expense of $1.8 million for the first nine months of 2026 was comparable to $1.8 million for the first nine months of 2025.

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Income Taxes

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The provision for income taxes was calculated at an effective rate of 22.2% and 21.7% for the first nine months of 2026 and 2025, respectively. The increase is primarily due to less tax benefits on the exercise of non-qualified stock options during the third quarter of 2026 compared to the third quarter of 2025.

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Segment Comparison of Three Months Ended September 26, 2026 to Three Months Ended September 27, 2025

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Franchising Segment Operating Income

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The franchising segment's operating income for the third quarter of 2026 increased to $15.8 million from $14.9 million for the third quarter of 2025. The increase in segment contribution was due to increased royalty revenue and software revenue, partially offset by an increase in selling, general, and administrative expenses.

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Former Other Operating Segment Income

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The Company had no other operating segment during 2026. The former other operating segment generated less than $0.1 million of operating income in the third quarter of 2025.

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Segment Comparison of Nine Months Ended September 26, 2026 to Nine Months Ended September 27, 2025

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Franchising Segment Income

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The franchising segment operating income for the first nine months of 2026 increased to $41.8 million from $41.6 million for the first nine months of 2025. The increase in segment contribution was due to increased royalty revenue and software revenue, partially offset by an increase in selling, general and administrative expenses.

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Former Other Operating Segment Income

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The Company had no other operating segment during 2026. The former other operating segment generated $2.3 million of operating income in the first nine months of 2025. The segment contribution in the first nine months 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 flows 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 third quarter of 2026 with $28.1 million in cash, cash equivalents and restricted cash compared to $39.9 million in cash, cash equivalents and restricted cash at the end of the third quarter of 2025.

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Operating activities provided $35.5 million of cash during the first nine months of 2026, compared to $36.4 million provided during the same period last year. The decrease in cash provided by operating activities during the first nine months of 2026 compared to 2025 was primarily due to an increase in non-cash operating working capital.

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Investing activities used $2.5 million of cash during the first nine months of 2026, compared to $0.2 million used during the same period last year. The 2026 activities primarily consisted of software development costs related to the modernization of our point-of-sale system.

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Financing activities used $15.3 million of cash during the first nine months of 2026. Cash used in financing activities during the first nine months of 2026 consisted of $10.8 million for the payment of dividends and $8.1 million for the repurchase of common stock; partially offset by $3.5 million of proceeds from exercise of stock options. See Note 9 - "Shareholders' Equity Deficit."

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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 September 26, 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 September 26, 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 10 - "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 2027.

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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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