What a difference a month makes.
On Oct. 10, I covered two stocks hitting 52-week lows that looked enticing. At the time, 150 stocks were hitting 52-week lows compared to 33 hitting 52-week highs, a ratio of 4.5 to 1. As I write this Tuesday midday, the ratio is down to 3 to 1, thanks to last week’s big rally.
Of the 33 stocks hitting 52-week highs today, thinly-traded small-cap franchisor Winmark (WINA) stands out. It has hit a new 52-week high 53 times over the past year, putting it in third position behind only Abercrombie & Fitch (ANF) at 55 times and Deckers Outdoor (DECK), one of my favorites, at 62.
Winmark is a stock that I’d followed for a long time but forgot about sometime before the pandemic began. In 2023, I’ve become interested in franchising stocks, and Winmark definitely fits the bill.
WINA stock is up more than 80% year-to-date and 179% over the past five years. Don’t be put off by its thin volume -- its 30-day average volume is just 31,178 -- it’s got a lot going for it and would make an excellent addition to any growth-oriented portfolio.
Here’s why.
Winmark’s Got a Bunch of Brands
Winmark currently franchises five brands: Plato’s Closet, Once Upon A Child, Play It Again Sports, Style Encore, and Music Go Round. As of Sept. 30, it had 1,312 franchise locations, with another 72 set to open in the future. In addition, 2,800 available territories remain, providing plenty of future growth.
Of the 1,312 locations open, Plato’s Closet accounts for the most (505), followed by Once Upon a Child (412) and Play It Again Sports (291). The excellent news is that 124 of the 125 locations with 10-year franchise agreements up for renewal in the first nine months of 2023 renewed, suggesting that these franchisees are more than happy with their Winmark experience.
Franchising as a concept is pretty simple: Go out and sell a bunch of franchises, get paid a one-time franchise fee to join the network, ensure that those franchisees are growing their location’s revenue, and collect a higher stream of revenue from royalties on those revenues.
Not only does the 99% renewal rate indicate that Winmark’s royalty revenue will continue to grow, but it also acts as a magnet for selling new franchises. Nobody wants to invest in a franchise where the franchisees are unhappy.
The first lesson of franchising: Keep your franchisees happy. If you do, the money will follow.
How’s Winmark Doing?
In the first nine months of 2023, the company's royalties Revenue was $53.1 million, 7.9% higher than a year earlier. It accounted for 84.0% of Winmark’s total revenue. Its second-highest revenue stream related to its five franchised brands is merchandise sales to franchisees. They were $3.6 million through the first nine months of the year, accounting for 5.7% of revenue. Lastly, it generates 4.1% of $63.2 million of its overall revenue from franchise fees and other franchise-related revenue.
You’ll notice a $3.9 million gap in its total revenue. That accounts for 6.2% overall. It is leasing income generated from its middle market equipment leasing business that Winmark chose to exit in 2021. As leases end, this business will continue to generate less revenue until it disappears completely.
So, excluding this business, Winmark’s revenue through Sept. 30 was $59.3 million, 9.0% higher than last year, while its operating income was $37.6 million, 3.6% higher than a year ago. Its operating margin is high at 64.5%, with its net margin at 48.2%.
The best way to convey that Winmark is performing exceptionally well is the special dividend it announced when it released its Q3 2023 results on October 18. Shareholders of record as of Nov. 15 will receive a $9.40 share special dividend on Dec. 1, and at the same time, it will pay out a $0.80 quarterly dividend.
Over the past two years, Winmark will have paid out $18.05 a share in dividend payments. I don’t see why that can’t continue.
In the trailing 12 months ended Sept. 30, its free cash flow was $44.5 million. Based on 3.49 million shares outstanding, it will pay out nearly $44 million in dividends in 2023. In 2022, it paid out $19.3 million, less than half its free cash flow.
In recent years, second-hand shops have become very popular with consumers. With lingering inflation and higher interest rates, Winmark is ideally positioned to benefit from a frugal consumer.
That being said, the strong performance of its stock over the past year has pushed its valuation to the brink. If you are looking for a value play, this isn’t a bet you want to make.
However, if you’ve got a longer-term hold in mind, I think it will continue to surprise you on the upside.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
