Executive Summary / Key Takeaways

• Asset-Light Franchising Dominance: Winmark Corporation operates a highly profitable, non-capital intensive franchising model focused on the growing resale market, generating consistent, high-margin royalty revenue from its 1,371 value-oriented retail stores across five distinct brands.
• Strategic De-risking Complete: The company has successfully executed an orderly run-off of its middle-market equipment leasing business, streamlining operations and reinforcing its focus on the core, cash-generative franchising segment, with the run-off substantially complete by mid-2025.
• Exceptional Profitability & Cash Generation: Winmark exhibits industry-leading profitability margins, with a TTM Gross Profit Margin of 96.24%, Operating Profit Margin of 65.17%, and Net Profit Margin of 49.48%, translating into robust operating cash flow of $24.12 million for the first six months of 2025.
• Consistent Shareholder Returns: The company demonstrates a strong commitment to shareholder returns through regular cash dividends, recently increased to $0.96 per share quarterly, and active share repurchase programs, funded by its ample free cash flow.
• Operational Efficiency and Brand Strength: Despite lacking proprietary, quantifiable technology differentiators, Winmark effectively leverages third-party software and e-commerce platforms to support its franchisees, driving higher retail sales and maintaining a high franchise renewal rate of 98%, underscoring the health and longevity of its royalty streams.

The Resale Revolution: Winmark's Enduring Model

Winmark Corporation, established in 1988 as Grow Biz International, Inc. before its rebranding in 2001, has cultivated a unique and highly effective business model centered on the burgeoning resale market. Operating as "the Resale Company," Winmark franchises value-oriented retail store concepts that specialize in buying, selling, and trading used merchandise. This approach aligns perfectly with broad industry trends emphasizing sustainability and circular economies, appealing to environmentally conscious consumers and those seeking value. The company's portfolio of well-known brands—Plato's Closet, Once Upon A Child, Play It Again Sports, Style Encore, and Music Go Round—caters to diverse demographics, from teenagers to parents and sports enthusiasts, solidifying its niche market leadership.

A pivotal strategic shift occurred in May 2021 when Winmark decided to exit its middle-market equipment leasing business, Winmark Capital, in favor of an orderly run-off. This move, now substantially complete by the first six months of 2025, underscores a deliberate focus on its core, non-capital intensive franchising segment. This strategic streamlining enhances the company's asset-light profile, which is designed to generate consistent, recurring revenue primarily through royalties and strong operating margins. This focus allows Winmark to allocate resources more efficiently, supporting its franchise partners and driving organic growth through new store openings.

The company's competitive standing is notably strong within its specialized resale niches. Unlike broader discount retailers or lease-to-own companies, Winmark's model fosters deep community ties and repeat business through its unique buy-sell-trade format. While direct quantitative market share figures against all competitors are not publicly detailed, Winmark's consistent store growth and high franchise renewal rates suggest robust demand for its model. The company's operational strength is evident in its network of 1,371 franchised stores as of June 28, 2025, reflecting a net increase of 21 stores in the first six months of the year alone, with 33 new openings and 12 closings. This expansion, coupled with a remarkable 98% renewal rate for franchise agreements available for renewal, highlights the enduring appeal and profitability of its system for franchisees.

Operational Excellence and Technological Enablement

Winmark's operational success is deeply rooted in its franchising system, which leverages a decentralized, entrepreneurial approach. The company's core revenue streams are royalties from franchisee sales, franchise fees from new and renewed agreements, and merchandise sales to franchisees. This royalty-driven model inherently leads to exceptional profitability. Winmark's TTM Gross Profit Margin stands at an impressive 96.24%, far surpassing competitors like Rent-A-Center (RCII) at 48%, Aaron's Company (AAN) at 52%, GameStop (GME) at 29%, Big Lots (BIG) at 33%, and Ollie's Bargain Outlet (OLLI) at 40%. This stark difference highlights the superior economics of Winmark's asset-light, royalty-based model compared to inventory-heavy retail or capital-intensive leasing operations.

While Winmark does not boast proprietary, cutting-edge technological differentiators in the traditional sense, its strategic use of technology is crucial for its operational efficiency and competitive edge. The company invests in third-party software licenses and technology to support its franchisees, enabling capabilities such as an e-commerce platform for Music Go Round, Play It Again Sports, and Style Encore brands. This platform allows franchisees to market and sell in-store product inventory online, expanding their reach and driving sales. The benefits are tangible: enhanced operational efficiency for franchisees, broader customer access, and ultimately, higher retail sales that directly translate into increased royalty revenue for Winmark. An increase in technology and compensation-related expenses, including a non-recurring expense for third-party software licenses for franchisees, was noted in the first six months of 2025, indicating ongoing investment in these enabling tools. This approach allows Winmark to remain agile and responsive to market demands without the heavy R&D burden of developing proprietary systems.

Comparing Winmark to its peers further illuminates its unique position. Its Operating Profit Margin of 65.17% and Net Profit Margin of 49.48% are substantially higher than those of RCII (7% OPM, 3% NPM), AAN (0.59% OPM, 0.13% NPM), GME (-0.69% OPM, 3% NPM), BIG (-8% OPM, -10% NPM), and OLLI (11% OPM, 9% NPM). This superior profitability underscores the strength of Winmark's business model, which minimizes direct operational costs by shifting inventory and labor responsibilities to franchisees. While competitors like RCII and AAN focus on leasing, and GME, BIG, and OLLI on direct retail, Winmark's franchising model offers a distinct advantage in scalability and capital efficiency, allowing it to generate significant cash flow with minimal capital expenditure.

Financial Performance and Shareholder Value Creation

Winmark's financial performance in the first half of 2025 demonstrates the resilience and profitability of its core franchising business. For the three months ended June 28, 2025, total revenue reached $20.42 million, a slight increase from $20.12 million in the comparable period of 2024. Net income for the quarter was $10.60 million, or $2.89 per diluted share, up from $10.43 million, or $2.85 per diluted share, in the prior year. For the six months ended June 28, 2025, net income was $20.56 million, or $5.60 per diluted share, compared to $19.25 million, or $5.26 per diluted share, for the same period last year.

Royalties, the lifeblood of Winmark's business, increased by 4.0% to $36.44 million for the first six months of 2025, driven by the expansion of its franchise store count and higher retail sales from existing franchisees. Selling, general, and administrative expenses saw a 7.4% increase to $14.02 million in the first six months of 2025, primarily due to investments in technology and compensation. The leasing segment, while winding down, contributed $2.35 million in revenue and $2.27 million in operating income for the first six months of 2025, significantly boosted by a $2.20 million settlement of outstanding customer litigation. Management anticipates that leasing income will be lower in the remaining quarters of 2025 as this portfolio run-off concludes.

The company's liquidity position remains robust, with $28.93 million in cash, cash equivalents, and restricted cash as of June 28, 2025.

Operating activities generated $24.12 million in cash during the first six months of 2025, an increase from $21.59 million in the prior year, reflecting strong net income and efficient working capital management. This strong cash generation fuels Winmark's commitment to shareholder returns. The company paid $6.58 million in dividends and repurchased 7,944 shares of its common stock for $2.42 million in the first half of 2025. The Board of Directors recently approved an increase in the quarterly cash dividend to $0.96 per share, demonstrating confidence in future cash flows. With $20.00 million available under its revolving credit facility and compliance with all debt covenants, Winmark is well-positioned to fund its operations through 2026.

It is worth noting Winmark's negative Debt/Equity ratio of -1.70. For a company with an asset-light, cash-generative model like Winmark, negative equity is often a result of consistent share repurchases and dividend payments exceeding retained earnings, rather than a sign of financial distress. The company's strong operating cash flow and compliance with debt covenants indicate a healthy financial position despite this accounting characteristic.

Outlook and Considerations

Looking ahead, Winmark's outlook is anchored by the continued growth and stability of its franchising segment. While the one-time boost from the leasing litigation settlement will not recur, the core royalty business is expected to maintain its consistent performance. The company's strategy remains focused on supporting its franchise partners to drive higher revenues, expanding its store footprint, and diligently managing its operating expenses. The high franchise renewal rate provides a strong foundation for future royalty streams.

Investors should consider a few key factors. The company's ability to grow operating income is directly tied to the success of its franchisees and its capacity to open new stores. While the asset-light model mitigates many traditional retail risks, it remains exposed to broader economic factors that could impact consumer spending on used goods. Furthermore, while the company has a foreign currency exposure (approximately 9% of 2024 revenues), the potential impact of a 10% exchange rate fluctuation on pretax earnings is estimated at $730,000, which is manageable given its overall profitability. The company does not currently use hedging instruments for this risk.

The competitive landscape, while diverse, sees Winmark holding a distinct advantage through its specialized, high-margin franchising model. While online marketplaces pose an indirect competitive threat by offering alternative channels for used goods, Winmark's physical store network and established brand loyalty provide a differentiated customer experience. The company's ongoing investment in third-party technology to enable franchisee e-commerce capabilities is a strategic response to these evolving market dynamics, aiming to blend the convenience of online shopping with the unique in-store experience of buying, selling, and trading.

Conclusion

Winmark Corporation presents a compelling investment thesis built upon a robust, asset-light franchising model that consistently delivers high margins and strong cash flow. The strategic decision to exit the capital-intensive leasing business has sharpened its focus on its core strength: enabling small businesses in the growing, sustainability-driven resale market. With a proven track record of expanding its franchise footprint, maintaining exceptional franchisee retention, and returning significant capital to shareholders through dividends and buybacks, Winmark stands out as a unique and profitable enterprise.

Despite lacking proprietary technological breakthroughs, Winmark's effective integration of third-party software to support its franchisees provides a crucial operational advantage, allowing it to thrive in a competitive retail environment. Its superior profitability metrics compared to industry peers underscore the power of its royalty-based revenue model. For investors seeking a resilient business with a clear path to consistent returns, underpinned by a lean operational structure and a commitment to shareholder value, Winmark Corporation offers a compelling opportunity within the dynamic resale industry.