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Winmark's Leasing Takes Off

By Michael Lewis - Apr 24, 2013 at 3:52PM

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The companys growth trajectory looks strong based on a quietly growing segment.

One of my favorite businesses, Winmark (WINA -5.61%), reported earnings this week. Earnings boosted 14% compared to the prior year's first quarter. Though the company continues to franchise its range of secondhand stores, the most compelling growth comes from the leasing division, which saw revenues jump by 30%. The company is underfollowed yet has been paying attractive special dividends while giving investors two-year capital appreciation of roughly 50%. As the company moves forward and pushes its leasing business to new heights, should you get in now?

Earnings recap
Winmark's core business is franchising secondhand-goods stores -- Plato's Closet (women's apparel), Play It Again Sports, Music Go Round, and Once Upon A Child. As of this past quarter, the company had nearly 1,000 franchised locations. Secondhand-goods stores tend to do great in rough economic times, and pretty good in boom times. Winmark has slowly and steadily grown the business over the years. This quarter, royalties from sales hit nearly $8.5 million, up from $8.22 million in the prior year's quarter. Now, 3.3% growth isn't too thrilling, especially for a business that isn't the most thrilling to begin with, but there were much more interesting figures from this quarter's earnings.

John Morgan, the founder and CEO, is a small- and mid-size-business leasing pro -- having founded and exited a very successful, very similar business prior to his time at Winmark. While it hasn't been the face of the company, Winmark's leasing business is where the growth is rapidly increasing.

For the quarter, Winmark's lease revenue topped $3.4 million, up from $2.4 million in the year-ago quarter. While the retail segment's 3.3% growth may be forgettable, 30% growth from leasing is certainly an eye-catcher. The growth came from a larger lease portfolio than in the past, and continued performance of prior loans. With the larger portfolio came an increase in leasing expense, but at half the growth rate of the corresponding income.

Not cheap, but so good
Winmark is a business I would love to own. Its CEO is its largest shareholder -- owning nearly a third of the business. It's an unsexy, neglected-by-the-Street company. It has many of the prerequisites for the fundamentals-centric investor, except the most important: price. Even with its recent hiccup in February due to an impaired investment charge, Winmark remains a pricey stock. Does that mean it won't continue to outperform the market in coming years?Not at all. I like management and I see the leasing business continuing to grow at an attractive clip, but at 24 times last year's earnings and an EV/EBITDA of 10.53, the company would need some pretty substantial growth year after year.

Keep an eye on this company long-term; any big dips may be a buy opportunity. With a return on equity of 75%, you know management is a smart capital allocator, and the business itself is cash-printing. For better or worse, Winmark remains one of my favorite stocks I don't own.

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