Flyover Stock: Winmark (WINA)
Flyover Stock: Winmark (WINA)
Taking another look at this classic Flyover Stock, ten years on.
Executive summary
Despite strong fundamental and market performance over the last decade, Winmark remains underfollowed by the street.
Executives and directors own 10.6% of shares outstanding.
Sold off capital-intensive leasing and financing businesses and is now completely focused on franchise retailing operations that have counter-cyclical demand characteristics.
In August 2014, I profiled Winmark in my "Seeking Small Cap Moats" series for Morningstar. Unfortunately, that post is no longer publicly available, but ten years on seemed like a good time to revisit this classic Flyover Stock anyway.
Even though Winmark has done well since we last looked at it, the company remains overlooked with one sell-side analyst following it.
I’m often asked how I find Flyover Stocks companies. In this case, a reader of my Morningstar series pointed me to Winmark a few months prior to my 2014 profile.
After reading this 2013 MinnPost article about then-CEO, John Morgan, it was clear that this was a company worth getting to know.
In the interview, Morgan mentioned his relationship with the Buffett family (he also hails from Omaha - something in the water?), his insistence on a margin of safety, and his favorite business aphorism, "Profit is fiction; cash is fact." The interview also touched on Morgan's participation in the World Series of Poker, where he famously bluffed a Russian billionaire with four eights into folding.
A dyed-in-the-wool value investor that understands probabilities and strategy is an attractive combination for a CEO.
While Morgan has since retired from the company, his example of thoughtful allocation continues under the leadership of current CEO Brett Heffes. More on current management in a moment.
Winmark is a franchisor of five national resale concepts specializing in buying and selling quality, lightly used merchandise. The concepts and their target customers are:
Plato's Closet: Teenager-young adult clothing
Once Upon a Child: Infant-12 years old clothing, toys, and accessories
Play It Again Sports: Sporting goods, all ages
Style Encore: Adult female apparel and accessories
Music Go Round: Musical instruments, all ages
As of March, there were 1,327 franchised location with the vast majority being Plato’s Closet (510), Once Upon a Child (420), and Play It Again Sports (296).
Given how quickly kids grow out of clothing and change interests, youth apparel and equipment is a particularly robust market for resale clothing.
Launched in 2013, Style Encore is Winmark’s newest concept. Sales have improved over time, but have likely fallen short of initial expectations.
Music Go Round generates high revenue per location, but musical equipment in not as large of a market as apparel and the number of locations has been flat since 2019.
Winmark's two largest concepts by royalty revenue are Plato's Closet and Once Upon a Child:
Customers can be buyers or sellers - or, most often, both - at Winmark franchises. Buying customers are motivated by the “treasure hunt” aspect of the store inventory and deep discounts on branded goods. Each franchise runs its own inventory, so what’s available at one location may not be available at other locations.
A selling customer brings gently used items into a Winmark franchise for evaluation. The franchisee evaluates the items for tears, stains, and imperfections, runs the items through a proprietary centralized pricing system (more on this below) and offers to buy only the desired items from the customer. Unwanted goods are returned to the customer. The franchise offers cash for the items or a slightly higher in-store credit.
Notably, the franchisees purchase the items with their own capital, not Winmark's. On average, franchisees buy about $1,100 worth of inventory per day.
The top three franchises by store-level revenue – Plato's Closet, Once Upon a Child, and Play It Again Sports – have attractive unit economics with high gross margins for retail.
Franchisees typically sign ten-year agreements, and renewal rates have been at 99% in recent years. In other words, the partnerships between Winmark and franchisees appear strong and mutually beneficial. Indeed, as the below image illustrates, it’s common for one franchisee to operate multiple concepts next door or in the same strip mall.
In addition to gently used inventory, Winmark has partnerships with brands to offer first-hand inventory that account for a single-digit percentage of sales for most concepts.
The timing of this profile also nicely coincides with a recent Wall Street Journal article discussing how, despite the "booming" business of secondhand apparel retail, companies in the space are struggling to turn a profit. The fact that the article didn't mention Winmark or its franchises, despite being a highly-profitable secondhand apparel company, speaks to its still under-the-radar status.
Transportation and fulfillment costs are a significant reason that e-commerce-based resale is challenging. High-priced items are likely to be sold directly through eBay or Facebook Marketplace, so retailers holding and selling lower-priced items have less margin to lose to shipping and logistics. If the intermediary – acting as principal or agent – undercuts the supplier or upcharges the end customer to make up for higher logistics costs, one party will leave dissatisfied.
In contrast, one of Winmark's advantages is that it is embedded in local communities, near where people are shopping anyway. From the customer's perspective, this also means you can bring in a large tub of items at a time for review and don't have to make a separate stop at a post office.
Here’s what Heffes said in a recent Business Breakdowns podcast on why Winmark franchises are profitable:
Our stores buy and sell used items on a daily basis, and we believe we're the only company doing this at scale. So what that means is we pay you cash for your items. And on average, each store paid out over $400,000 in cash to customers in the community. That's over $1,100 a day they're paying out. We focus on the value end of the spectrum and that's why we're set up the way we are because we can actually buy and sell low-priced items profitably for our franchisees.
And we think that for those class of goods, it's the most sustainable option. There's no packaging. There's no shipping. There's no robots moving around the warehouse. And more importantly, the goods get shipped into the community once and they stay there.
Winmark has a unique business model in a growing end market where most of its competitors struggle to turn a profit. In short, it's worth researching.
Let's look closer at Winmark's moat, management, and valuation.