Executive Summary / Key Takeaways

• Winmark Corporation is transforming into a focused, asset-light franchising leader, systematically exiting its legacy equipment leasing business to concentrate on its high-margin resale brands.
• The company demonstrates robust financial health, with royalties increasing by 5.1% for the first nine months of 2025, driving strong operating income and cash flow generation, exemplified by $36.40 million in cash from operations during the same period.
• Winmark maintains a strong commitment to shareholder returns, evidenced by consistent quarterly dividends and a recently approved $10 per share special cash dividend, totaling approximately $35.60 million.
• The company's competitive advantage stems from its established network of 1,377 franchised resale stores and strong brand recognition, fostering customer loyalty and high franchise renewal rates.
• While Winmark's operational technology supports its franchise network effectively, its primary challenge lies in accelerating digital innovation to compete more aggressively with online-first resale platforms.

The Resale Revolution: Winmark's Asset-Light Advantage

Winmark Corporation, known as "the Resale Company," is carving out a distinctive niche in the retail landscape by championing sustainability and small business formation through its portfolio of value-oriented resale franchises. This strategy positions Winmark as an asset-light operator, generating consistent, recurring revenue and strong operating margins. The company's core business revolves around licensing popular brands such as Plato's Closet, Once Upon A Child, Play It Again Sports, Style Encore, and Music Go Round, which specialize in buying, selling, and trading gently used merchandise.

Winmark's strategic evolution is marked by a pivotal decision made in May 2021 to discontinue soliciting new customers for its middle-market equipment leasing business, Winmark Capital. This segment is now in an orderly run-off, with management anticipating no leasing income after the fourth quarter of 2025. This strategic pivot underscores Winmark's commitment to streamlining operations and focusing on its highly profitable franchising model, which inherently requires less capital investment. This focus allows the company to leverage its established brand equity and operational expertise across a diverse range of consumer goods.

In the broader competitive arena, Winmark distinguishes itself from purely digital marketplaces like eBay (EBAY) by offering a tangible, community-based retail experience. While eBay provides vast reach and convenience, Winmark's franchised stores offer in-person transactions and a trusted environment for both consignors and buyers, fostering strong local customer loyalty. Compared to niche retailers such as GameStop (GME), which focuses on electronics and games, Winmark's diversified brand portfolio across clothing, children's items, sports equipment, and musical instruments provides a broader appeal and reduces reliance on a single product category. However, Winmark faces vulnerabilities in the pace of digital innovation compared to its online-first counterparts, which could impact its ability to capture market share in evolving e-commerce segments.

Operational Technology: Enabling the Franchise Ecosystem

Winmark's operational technology plays a crucial role in supporting its extensive franchise network, rather than being a standalone, differentiated technology in the traditional sense. The company utilizes a Computer Support Center to facilitate merchandise sales to its franchisees, ensuring a streamlined supply chain for essential products. Furthermore, Winmark provides an e-commerce platform that enables franchisees of its Music Go Round, Play It Again Sports, and Style Encore brands to market and sell their in-store inventory online. This dual approach helps franchisees expand their reach beyond physical storefronts, enhancing sales opportunities and operational efficiency.

The strategic intent behind these technological investments is to empower franchisees, improve their operational effectiveness, and ultimately drive higher revenues across the network. For instance, the recent increase in selling, general, and administrative expenses for the first nine months of 2025, which rose by 11% to $21.07 million, was partly attributed to a non-recurring expense related to third-party software licenses for franchisees. This investment highlights Winmark's ongoing commitment to providing its franchise partners with the tools necessary to thrive in a competitive retail environment. While not a "deep tech" moat, this operational technology contributes to Winmark's competitive positioning by enhancing franchisee support and expanding sales channels, thereby reinforcing the value proposition of its franchise system.

Financial Strength and Shareholder Returns

Winmark's financial performance for the first nine months of 2025 demonstrates the resilience and profitability of its franchising model. Total revenue for this period reached $64.97 million, an increase of 5.2% from $61.74 million in the prior year. Royalties, the most significant revenue stream for the franchising segment, grew by 5.1% to $57.35 million, primarily driven by higher franchise retail sales and an increase in the number of franchise stores. As of September 27, 2025, Winmark boasted 1,377 franchised stores, a net increase of 27 locations since December 28, 2024. This growth in the franchise footprint and retail sales underscores the health of the core business.

The company's profitability metrics are robust, reflecting its asset-light model. Winmark reported a TTM Gross Profit Margin of 96.29%, an Operating Profit Margin of 64.30%, and a Net Profit Margin of 48.84%. These high margins are indicative of the efficiency inherent in a franchising business that primarily generates revenue from royalties and fees. Net income for the first nine months of 2025 was $31.69 million, an increase of 4.3% over the same period in 2024. Diluted earnings per share also saw a healthy rise to $8.61 from $8.29 year-over-year.

Cash flow generation remains a significant strength for Winmark. Operating activities provided $36.40 million in cash during the first nine months of 2025, an increase from $33.70 million in the comparable period of 2024. This strong cash flow supports the company's capital allocation strategy, which is heavily focused on returning value to shareholders. Winmark has a history of consistent quarterly cash dividends, and on October 15, 2025, the Board of Directors approved a special cash dividend of $10 per share, totaling approximately $35.60 million, to be financed with cash on hand. The company also actively repurchases its common stock, having repurchased 7,944 shares during the first nine months of 2025. While the company's Debt/Equity ratio is negative, this is often observed in highly profitable companies that have consistently returned capital to shareholders through buybacks, leading to a reduction in equity. Importantly, Winmark remains in compliance with all financial covenants under its credit facilities.

The leasing segment, while winding down, contributed to the nine-month revenue figures with $2.40 million, an increase from $1.68 million in the prior year. This increase was primarily due to the settlement of outstanding customer litigation. However, the third-quarter leasing income decreased significantly to $46,600 from $316,200, reflecting the nearing completion of the portfolio run-off.

Outlook and Risk Considerations

Winmark's forward-looking statements reinforce its strategic direction. The company explicitly anticipates no leasing income to be recognized after the fourth quarter of 2025, marking the full transition to a pure-play franchising model. Management believes that the combination of cash on hand, cash generated from business operations, and its existing Line of Credit will be sufficient to fund planned operations through 2026. This guidance underscores confidence in the ongoing cash-generative capabilities of the franchising business.

Despite a strong financial position, investors should consider several risks. The company's ability to meet its debt service obligations depends on future performance, which can be influenced by broader economic factors. While Winmark's fixed-rate debt provides some stability, refinancing maturing debt at potentially higher interest rates could impact future interest expenses. Furthermore, with approximately 9% of its total revenues in fiscal 2024 denominated in foreign currency, a 10% fluctuation in exchange rates could impact annual pretax earnings by approximately $730,000. The company currently does not use derivative instruments to hedge against these currency risks. The competitive landscape, particularly the rapid evolution of online resale platforms, also presents a long-term challenge that Winmark must continue to address through its own digital initiatives and franchisee support.

Conclusion

Winmark Corporation is executing a compelling strategic transformation, shedding its capital-intensive leasing operations to fully embrace its high-margin, asset-light franchising model. The company's focus on sustainability and small business formation, coupled with a diversified portfolio of established resale brands, underpins a robust and recurring revenue stream. Strong financial performance, characterized by consistent royalty growth, impressive profitability margins, and significant cash flow generation, highlights the effectiveness of this strategy.

Winmark's unwavering commitment to shareholder returns, demonstrated through regular dividends and substantial special dividends, further enhances its investment appeal. While the company's operational technology effectively supports its franchise ecosystem, continuous investment in digital innovation will be crucial to maintain its competitive edge against agile online platforms. For discerning investors, Winmark presents a unique opportunity to participate in a resilient business model with a clear strategic direction, strong financial fundamentals, and a proven track record of returning capital to shareholders. Monitoring the company's continued expansion of its franchise network and its strategic responses to the evolving digital retail landscape will be key to assessing its long-term growth trajectory.