Winmark Corporation (WINA) is a trailblazer in the retail industry, pioneering a unique franchise-based business model that has propelled it to the forefront of the rapidly growing resale market. Founded in 1988 and headquartered in Minneapolis, Minnesota, Winmark has established a robust portfolio of thriving retail concepts, each catering to a specific consumer niche and collectively cementing the company's reputation as a visionary in the world of secondhand shopping.
Business Overview and History
Winmark's journey began over three decades ago when the company launched its first franchise, Plato's Closet, in 1993. This specialty retailer focused on buying and selling gently used teen and young adult apparel and accessories. The concept quickly gained traction, leading to the expansion of Winmark's offerings. In 1994, the company launched Once Upon A Child, catering to children's merchandise. This was followed by Play It Again Sports in 1999, which focused on sporting goods. In more recent years, Winmark has continued to diversify its portfolio, introducing Style Encore for women's fashion in 2013 and Music Go Round for musical instruments and equipment in 2015.
In addition to its retail concepts, Winmark ventured into the equipment leasing business in the mid-2000s with the launch of Winmark Capital. This segment provided equipment financing solutions to small and medium-sized businesses. However, in 2021, the company made the strategic decision to no longer solicit new leasing customers and instead pursue an orderly run-off of the existing leasing portfolio.
Throughout its history, Winmark has faced various challenges, including the 2008-2009 financial crisis, which impacted consumer spending and the company's franchise operations. Additionally, the rise of online shopping has presented new competitive pressures, requiring Winmark to adapt its franchise concepts to remain relevant. Despite these obstacles, the company has maintained a strong market position and continued to grow its franchise network.
Today, Winmark's franchise network comprises over 1,300 stores across the United States and Canada, a testament to the enduring appeal of its business model. The company's franchisees benefit from a comprehensive support system, including site selection assistance, training, marketing, and operational guidance, enabling them to capitalize on the growing consumer demand for sustainable and affordable shopping alternatives.
Financial Performance and Resilience
Winmark's financial performance has been consistently strong, with the company reporting impressive revenue and net income figures. In the latest fiscal year, the company recorded revenue of $83.24 million and net income of $40.18 million, reflecting the resilience and adaptability of its business model even in the face of challenging economic conditions.
Financials
For the most recent fiscal year (2023), Winmark reported revenue of $83.24 million and net income of $40.18 million. The company generated operating cash flow of $43.99 million and free cash flow of $43.61 million. In the most recent quarter (Q3 2024), revenue was $21.51 million, with net income of $11.12 million. Operating cash flow and free cash flow for the quarter were both $12.11 million.
Year-over-year growth in the most recent quarter showed some challenges, with revenue decreasing 3.6% from $22.32 million in Q3 2023. Net income remained relatively flat, decreasing 0.3% from $11.15 million in the prior year quarter. Operating cash flow and free cash flow decreased 6.2% and 5.1% respectively from Q3 2023 levels. These decreases were primarily attributed to lower leasing income and merchandise sales compared to the prior year quarter.
Winmark operates two main segments: Franchising and Other (leasing). The Franchising segment, which includes the company's five franchise brands, saw an increase in operating income to $38.80 million during the first nine months of 2024, up from $37.60 million in the same period of 2023. This growth was primarily driven by a 2.8% rise in royalty revenues, which reached $54.56 million, as the company added more franchise stores compared to the prior year.
The Other segment, representing Winmark's middle-market equipment leasing business, experienced a decrease in operating income to $1.30 million in the first nine months of 2024, down from $3.20 million in the same period of 2023. This decline was due to a decrease in leasing income, net of leasing expenses, following the company's decision in May 2021 to no longer solicit new leasing customers and pursue an orderly run-off of its leasing portfolio.
Liquidity
Winmark's balance sheet remains robust, with a healthy current ratio of 3.84 and a quick ratio of 3.80, indicating strong liquidity. The company's debt-to-equity ratio stands at -1.95, reflecting a conservative approach to leveraging. As of September 28, 2024, Winmark had $37.29 million in cash, cash equivalents, and restricted cash.
The company's liquidity position is further strengthened by its available credit facilities. Winmark had $30 million available on its $20 million revolving line of credit and $64.85 million in long-term debt as of the latest quarter. Additionally, the company has a $100 million private shelf facility with Prudential, of which $36 million was drawn as of the most recent reporting period.
Winmark's operational efficiency is a key driver of its success. The company's franchise model allows for a highly scalable and capital-light approach, with franchisees responsible for the majority of the upfront costs associated with opening and operating their stores. This, in turn, has enabled Winmark to maintain industry-leading operating margins, which have consistently exceeded 60% in recent years.
Operational Efficiency and Diversification
Furthermore, Winmark's diversified brand portfolio has been instrumental in mitigating risk and capitalizing on evolving consumer preferences. While the company's primary revenue streams are derived from franchise royalties and leasing income, it also generates revenue from merchandise sales and franchise fees, providing a balanced and resilient revenue mix.
Poised for Continued Growth
The resale industry has experienced remarkable growth in recent years, driven by heightened consumer interest in sustainability, affordability, and unique shopping experiences. Winmark has been at the forefront of this trend, leveraging its established brand recognition and operational expertise to capitalize on the growing demand for secondhand goods.
Looking ahead, the company's management team has outlined a strategic vision focused on continued franchise expansion, further strengthening its brand portfolio, and exploring opportunities in adjacent sectors. With a robust pipeline of new franchise openings and a strong financial foundation, Winmark is well-positioned to maintain its position as a dominant player in the resale retail landscape.
The resale/secondhand retail industry has seen strong growth in recent years, with a compound annual growth rate (CAGR) of 15-20%. Winmark's franchise concepts are well-positioned to capitalize on this trend as consumers increasingly seek value and sustainability in their purchases.
Risks and Challenges
While Winmark's business model has proven resilient, the company is not immune to industry-wide challenges and macroeconomic headwinds. The continued evolution of consumer preferences, increased competition from both traditional and online retailers, and potential regulatory changes could present risks to Winmark's long-term growth trajectory.
Additionally, the company's reliance on a franchise-based model means that its success is intrinsically linked to the performance and financial health of its franchisees. Any disruptions or challenges faced by the franchisee network could potentially impact Winmark's overall financial and operational results.
The recent declines in revenue, earnings, and cash flow in the most recent quarter bear watching going forward. The company will need to effectively manage its core franchise operations to offset the declining contribution from the leasing segment as it continues its orderly run-off.
Conclusion
Winmark Corporation has firmly established itself as a visionary leader in the resale retail industry, pioneering a franchise-based business model that has driven consistent growth and financial success. With its diverse brand portfolio, operational efficiency, and a strong focus on sustainability and affordability, the company is well-positioned to capitalize on the continued expansion of the secondhand shopping market.
As Winmark navigates the evolving retail landscape, its proven track record of innovation, financial discipline, and adaptability positions it as a compelling investment opportunity for those seeking exposure to the dynamic and rapidly growing resale sector. The company's focus on supporting its franchise partners, opening new franchises, and controlling selling, general and administrative expenses has been critical to its ability to maintain profitability and grow its Franchising segment, even as it manages the run-off of its leasing business.