Winmark Sails Into 2014 With the Wind at Its Back

Winmark Corporation (NASDAQ: WINA  ) lacks a recognizable name and the required market attention for many investors to realize what a great stock it really is. The company franchises a handful of brands that specialize in various consignment shops: Plato's Closet, Play It Again Sports, Music-Go-Round, Once Upon a Child, and the recently introduced Style Encore. As consumers are becoming increasingly conscious of their spending habits despite an improving economy, resale is becoming a better and better substitute to retail. For Winmark, the business risk is further mitigated as the company does not own physical locations and operate them -- its core business model is lean and cash flow-focused. Recent earnings showed growth across every segment, though the market did not react favorably. Here's why income-seeking and risk-averse investors should look at Winmark.

The year in review
2013, a period in which most retailers (except for the high-end) struggled to keep sales and earnings propped up amid an extremely conservative consumer-spending environment, was a strong year for Winmark and its five franchise assets. Net sales went from $51.94 million to $55.73 million -- a modest yet respectable gain considering the industry conditions. Income fared much better -- up to $18.23 million from $12.94 million. Investors should note that while the fourth quarter showed a more than doubled profit, the gain was almost entirely due to noncash charges from 2012's fourth quarter and not an organic sales gain.

Royalty revenue still represents the lion's share of Winmark's sales, though leasing income is steadily increasing from year to year. Besides its franchises, Winmark operates a small and midsize business-leasing segment -- a very high-ROIC business that the company's founder and CEO, John Morgan, has expertly practiced for decades. Before Winmark, Morgan founded and ran a business-leasing company before selling it to private buyers for a pretty penny.

Though leasing revenue rose by a little more than a million in 2013, leasing expense actually decreased from $1.79 million to $1.59 million.

Still a no-brainer?
In the past three years, Winmark stock has appreciated more than 100%, with 26% gains in the last 12 months. While there are certainly stocks with faster growth trajectories, this does present the question of whether Winmark is still attractively priced considering its slow but steady business model.

Winmark trades at roughly 22.45 times its full-year 2013 earnings. For a company that likely won't be growing earnings by the double digits for the next 10 years, the valuation doesn't scream bargain. Still, look at the quality of the underlying business. Winmark has a 40% return on assets and a 61% return on equity. The operating margin is more than 53%. Current assets are twice that of the company's total liabilities.

Winmark is built for the long run.

While it may not be the no-brainer bargain it was a few years ago, Winmark is still a great long-term hold. Investors who believe in buying great businesses at a fair price, take a close look here.

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  • Report this Comment On February 27, 2014, at 1:10 PM, Jc3720 wrote:

    Good article, but the author will be surprised by future growth. Style encore has gone from 0 to 39 announced locations in a matter of months. The number of franchise agreements signed but not open is a record high, now exceeding 100. Franchisees are relocating from small sq ft stores doing moderate volumes, to large sq ft. Stores doing large volumes. Look for further concept growth and acquisitions both in resale concepts, and for the first time in non resale concepts. The CEO owns a huge portion of the stock, and is very shareholder friendly. Lastly, look for more growth in the leasing business. The shres are thinly traded, but it gives you an opportunity to buy in right if you are patient. The franchisor model is a gold mine business. It helps that the franchisees do well and are very profitable at the store level.

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