A 2022 survey by Cinch Home Services showed that two out of three Americans were ashamed of the clutter in their houses. This struggle to store belongings has played a significant role in the rise of the circular economy.
The circular economy includes sales of secondhand, rental, recycled, and refurbished goods. Simply speaking, it turns "trash" into treasure for a new owner, reutilizing items that would otherwise gather dust in a closet or garage and eventually become useless. Statista believes these resale transactions are set to double in volume worldwide between 2022 and 2026.
One company uniquely positioned to thrive amid the circular economy's boom is Winmark (WINA -1.55%), a sustainability-focused franchisor. Through its five popular store brands, Winmark's mission is "to provide resale to everyone." With the U.S. economy unlikely to lose its passion for capitalistic spending anytime soon, Winmark could be a great buy following its recent 22% dip. Here's why.
Winmark's resale brands
With an annualized total return of 22% since the turn of the century, Winmark has turned a $10,000 investment into more than $1 million in just two and a half decades. Leading these incredible returns are the company's franchisees, who buy and resell gently used merchandise through Winmark's five store brands:
- Plato's Closet (506 stores at the end of 2023): Clothing for teens and young adults.
- Once Upon a Child (416 stores): Children's clothing, toys, furniture, and equipment.
- Play It Again Sports (294 stores): Sporting goods and equipment, differentiated regionally to suit weather.
- Style Encore (66 stores): Women's apparel, shoes, and accessories.
- Music Go Round (37 stores): Musical instruments, speakers, amps, electronics, and accessories.
Through this diversified base of resale brands, Winmark estimates that it extended the lives of over 182 million items in 2023 alone. By providing the training, operational support, and purchasing know-how necessary to get a location up and running, Winmark helps hundreds of entrepreneurs participate in the circular economy through its franchise model.
To highlight the power of Winmark's value proposition to these entrepreneurs, consider that the top quartile of its Play It Again Sports stores generate $1.2 million in annual sales with a gross profit margin of 53%. In comparison, its peer, Dick's Sporting Goods, holds a gross profit margin of just 34%, demonstrating the high margins provided by Winmark's resale operations.
Since it's renewed over 99% of its franchise agreements over the last three years, it's safe to assume that plenty of these gross profits are trickling down to the bottom line for franchisees, or the company wouldn't maintain this impressive retention rate.
Image source: Getty Images.
Winmark's free cash flow all goes back to shareholders
Thanks to an asset-light franchise model that sees the company earn 5% royalties from its franchisees, Winmark boasts an enviable 52% free cash flow (FCF) margin. This makes the company a genuine cash cow -- it generated nearly $44 million in FCF compared to only $384,000 needed for capital expenditures in 2023.
Most importantly for investors, however, Winmark loves to return this cash to shareholders.
After its first quarterly dividend payment of $0.02 in 2010, Winmark has grown its payouts for 13 consecutive years, paying $0.80 in its most recent quarter. This is only a portion of the story for investors, though. In each of the last four years, the company has paid special one-time dividends amounting to a cumulative total of $12.90, equaling nearly 4% of Winmark's current share price.
Furthermore, over the last five years, management has repurchased an average of $33 million of its shares annually. Compared to its average annual FCF generation of $40 million over this time, it is clear that Winmark goes above and beyond in its efforts to return cash to shareholders.
WINA Shares Outstanding data by YCharts
Despite lowering its share count by 32% since 2014, the company did not buy back a single share of its stock in 2023. This was arguably a wise move by management, as Winmark's valuation had ballooned well above recent averages.
WINA Price to Free Cash Flow data by YCharts
Using history as an example, when Winmark's shares look pricey, management pays larger special dividends and foregoes share buybacks. When the company is reasonably priced or cheap, it repurchases shares of its stock and lowers its special dividend. Thanks to this straightforward capital allocation system, I am comfortable with dollar-cost averaging into a bigger position in Winmark after its recent dip, even though its valuation remains slightly above recent levels.
If the stock keeps dropping after I buy, management will likely swoop in and scoop up shares at a better price, boosting the company's FCF-per-share figures. If it goes higher, that's great -- and I'll probably keep receiving dividend payments along the way.
One thing for investors to note with Winmark is that management is notoriously quiet regarding their operations, not even having quarterly conference calls. In fact, Chief Executive Officer Brett Heffes's full explanation for 2023's operating results was: "Our 2023 results reflected positive performance by our franchise partners; however, growth was lower in the second half of the year." Thanks to Winmark's hushed communications policy, the stock may be best for investors who think in decades and are confident that the circular economy's megatrend will guide the company's operations to success over the long haul.
