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Winmark Sails Into 2014 With the Wind at Its Back

By Michael Lewis – Feb 27, 2014 at 12:19PM

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While much of the retail industry struggles to keep customers shopping, resale franchiser Winmark is having an easier time. Take notice, long-term-oriented investors.

Winmark Corporation (WINA 0.38%) 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.

Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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