Executive Summary / Key Takeaways

• Winmark Corporation (NASDAQ:WINA) operates a highly profitable, capital-light franchising model focused on value-oriented resale retail, generating robust recurring royalty revenue from its five distinct brands.
• The company demonstrates exceptional financial efficiency, characterized by TTM gross margins exceeding 96%, operating margins above 65%, and net margins near 50%, significantly outpacing many traditional retailers and competitors in related sectors.
• Strong cash flow generation, with TTM free cash flow margins around 50%, supports consistent shareholder returns through dividends (recently increased to $0.96 per share quarterly) and ongoing share repurchases.
• First quarter 2025 results showed a modest increase in total revenue driven by a non-recurring litigation settlement in the winding-down leasing segment, while core franchising royalties grew due to additional stores.
• Key factors for investors to monitor include continued franchise network growth, management of operating expenses (specifically investments in technology), and the successful completion of the equipment leasing portfolio run-off.

The Resale Engine: A Capital-Light Model Driving Exceptional Margins

Winmark Corporation, known as "the Resale Company," has built a durable business over 35 years by tapping into the circular economy through a distinct franchising model. Unlike traditional retailers burdened by extensive inventory risk and capital expenditures, Winmark licenses its five value-oriented retail brands – Plato's Closet, Once Upon A Child, Play It Again Sports, Style Encore, and Music Go Round – to independent franchisees. This structure positions Winmark primarily as a franchisor, generating consistent, recurring royalty revenue based on franchisee sales. This strategic choice underpins the company's remarkably capital-light operation and its ability to generate strong operating margins.

Historically, Winmark also operated a middle-market equipment leasing business under the Winmark Capital mark. However, a strategic decision was made in May 2021 to cease new leasing activities and pursue an orderly run-off of this portfolio. This move further sharpens the company's focus on its core, high-margin franchising segment.

In the competitive landscape, Winmark's model stands apart from traditional retailers like Big 5 Sporting Goods (BGFV), which operates an asset-heavy retail footprint with lower margins (BGFV's TTM gross margin is around 29%). While companies like GameStop (GME) engage in used goods resale, their model is also more retail-centric with significantly lower gross margins (GME TTM gross margin is around 29%). Rent-A-Center (RCII), while involved in leasing, focuses on consumer goods financing with gross margins around 48% TTM. Winmark's franchising approach, where franchisees bear the primary operational costs and inventory risk, allows Winmark to achieve vastly superior profitability metrics.

The company's operational technology plays a crucial role in supporting its decentralized franchise network. While not a manufacturing or deep-tech company in the traditional sense, Winmark provides essential systems to its franchisees, including point-of-sale and inventory management tools, often facilitated through its Computer Support Center. Recent investments in third-party software licenses for franchisees contributed to an increase in selling, general, and administrative (SG&A) expenses in the first quarter of 2025. The integration of online capabilities, such as the platform supporting Play It Again Sports, demonstrates an ongoing effort to enhance the operational efficiency of the network. This online integration is noted to provide faster transaction processing speeds compared to more traditional retail models like BGFV's. The strategic intent behind these technology investments is to empower franchisees, streamline operations, and ultimately drive higher sales, which in turn increases Winmark's royalty revenue.

Financial Performance: High Margins and Cash Generation

Winmark's financial performance reflects the inherent strengths of its business model. For the three months ended March 29, 2025, total revenue was $21.92 million, an increase from $20.11 million in the comparable period of 2024. This increase was primarily driven by a significant rise in leasing income to $2.31 million (from $0.84 million in Q1 2024), largely attributable to a $2.20 million settlement of outstanding customer litigation in the equipment leasing segment.

Core franchising royalties, the company's most significant revenue source, saw a modest increase of 2.9%, rising to $17.77 million in Q1 2025 from $17.27 million in Q1 2024. This growth was primarily a result of having additional franchise stores in operation. Franchise fees were comparable year-over-year ($0.33 million vs. $0.36 million), while merchandise sales decreased slightly ($0.94 million vs. $1.11 million), primarily due to lower technology purchases by franchisees.

Despite the increase in total revenue, franchising segment operating income slightly decreased to $11.37 million in Q1 2025 from $11.48 million in Q1 2024. This was mainly due to a 9.1% increase in selling, general, and administrative (SG&A) expenses to $7.43 million, primarily driven by the non-recurring software license expense mentioned earlier. However, the non-reportable leasing segment's operating income surged to $2.22 million (from $0.74 million), boosting total income from operations to $13.60 million compared to $12.22 million in Q1 2024.

Winmark's profitability margins are a key highlight. For the trailing twelve months (TTM), the company boasts a gross profit margin of 96.11%, an operating profit margin of 65.35%, and a net profit margin of 49.45%. These figures demonstrate exceptional cost control and efficiency, particularly within the franchising model, and stand in stark contrast to the lower margins of its retail and leasing competitors.

The capital-light nature of the business translates directly into robust cash flow generation. Operating activities provided $15.08 million in cash during the first three months of 2025, an increase from $13.36 million in the prior year period, driven by higher net income and favorable changes in non-cash working capital. This strong operating cash flow fuels significant free cash flow, which stood at approximately $15.03 million in Q1 2025. For the TTM, free cash flow per share was $12.35, with a free cash flow margin of around 50%.

Liquidity, Capital Allocation, and Shareholder Returns

Winmark maintains a healthy liquidity position, ending Q1 2025 with $21.83 million in cash and cash equivalents. Historically, the company's primary sources of liquidity have been cash flow from operations and borrowings. As of March 29, 2025, the company had $30.00 million in delayed draw term loan borrowings outstanding under its Line of Credit, maturing in 2029, and $30.00 million in Series C notes outstanding under its Note Agreement with Prudential (PRU), maturing in 2028. Both facilities are secured by substantially all of the company's assets and contain customary financial covenants, with which Winmark was in compliance as of the reporting date. A Private Shelf Agreement with Prudential, which allowed for potential future note issuances, expired on April 12, 2025, without any notes being issued under it.

The company's strong cash flow generation supports a consistent return of capital to shareholders. During the first three months of 2025, Winmark used $3.19 million for dividend payments and $2.25 million to repurchase 7,383 shares of its common stock. The Board of Directors recently approved an increase in the regular quarterly cash dividend to $0.96 per share, up $0.06 from the previous rate, signaling confidence in the company's ongoing cash generation capabilities. As of March 29, 2025, the company had authorization to repurchase an additional 71,217 shares.

Management believes that the combination of cash on hand, cash generated from operations, and the available Line of Credit will be adequate to fund planned operations through 2025.

Outlook and Risks

The outlook for Winmark is largely tied to the performance and expansion of its franchising segment and the final stages of the leasing portfolio run-off. Management anticipates that net leasing income will be lower in the remaining quarters of 2025 compared to the last three quarters of 2024, given that the run-off is substantially complete and the Q1 2025 results included a significant non-recurring settlement.

Growth in the franchising segment is dependent on supporting existing franchisees to increase their revenues, successfully opening new franchises, and controlling SG&A expenses. The company saw net store growth of 13 locations in the first three months of 2025 (17 openings, 4 closings), bringing the total to 1363 franchised stores. A key positive indicator is the 100% renewal rate for franchise agreements available for renewal in Q1 2025, suggesting franchisee satisfaction and confidence in the business model.

Despite the strong operational performance and cash flow, Winmark faces risks. Its ability to meet expenses and debt obligations depends on future performance, which is subject to financial, business, and economic factors. While the company's debt is currently manageable and covenants are met, refinancing risk exists for fixed-rate debt if new debt is needed at higher interest rates. Foreign currency fluctuations also pose a minor risk, with a 10% change in relevant exchange rates potentially impacting annual pretax earnings by approximately $730,000 based on 2024 foreign currency revenues. The company's dependence on franchisee success also presents a risk; while high renewal rates are positive, factors impacting franchisee profitability could indirectly affect Winmark's royalty revenue.

Conclusion

Winmark Corporation presents a compelling investment case built on a highly efficient, capital-light franchising model within the growing circular economy. Its focus on value-oriented resale retail, supported by operational technology, drives exceptional profitability margins and robust free cash flow generation that significantly differentiate it from more traditional retail and leasing competitors.

While the non-recurring boost from the leasing segment settlement in Q1 2025 highlights the final stages of that business's run-off, the core franchising segment continues its steady growth trajectory, supported by network expansion and strong franchisee retention. The company's commitment to returning capital through dividends and share repurchases underscores its financial strength and management's confidence. Investors should focus on the continued expansion and health of the franchise network as the primary driver of future value, while monitoring operational expense management and the successful wind-down of the legacy leasing business. Winmark's unique positioning and financial discipline offer a distinct profile in the market.