A 2022 survey by Cinch Home Services showed that two out of three Americans were ashamed of the clutter in their houses. This struggle to store belongings has played a significant role in the rise of the circular economy. Statista believes these resale transactions are set to double in volume worldwide between 2022 and 2026.
One company uniquely positioned to thrive amid the circular economy’s boom is Winmark (NASDAQ: WINA), a sustainability-focused franchisor. Following its recent 22% dip, Winmark emerges as a compelling opportunity in the market. Here’s why.
Embracing the Circular Economy
With an annualized total return of 22% since the turn of the century, Winmark has transformed a $10,000 investment into more than $1 million in just two and a half decades. Driving these exceptional returns are Winmark’s franchisees, operating under the umbrella of five popular store brands:
- Plato’s Closet (506 stores at the end of 2023): Clothing for teens and young adults.
- Once Upon a Child (416 stores): Children’s clothing, toys, furniture, and equipment.
- Play It Again Sports (294 stores): Sporting goods and equipment.
- Style Encore (66 stores): Women’s apparel, shoes, and accessories.
- Music Go Round (37 stores): Musical instruments, electronics, and accessories.
Through empowering entrepreneurs to participate in the circular economy, Winmark estimates that it extended the lives of over 182 million items in 2023 alone. The company’s robust franchise model offers vital training, support, and purchasing know-how, fostering a thriving resale ecosystem.
Illustrating the strength of Winmark’s value proposition, the top quartile of its Play It Again Sports stores achieve impressive annual sales of $1.2 million with a gross profit margin of 53%, overshadowing industry peers like Dick’s Sporting Goods. With a remarkable franchise agreement renewal rate exceeding 99%, Winmark’s success story resonates deeply with its stakeholders.
Unlocking Shareholder Value
Thanks to its asset-light franchise model generating a 52% free cash flow (FCF) margin, Winmark stands out as a cash cow in the market. The company’s commitment to shareholder value is evident through its consistent returns of cash through dividends and share repurchases.
Since initiating quarterly dividend payments in 2010, Winmark has maintained a streak of 13 years of dividend growth. Moreover, the company’s special one-time dividends over the past four years, totaling $12.90, reflect a dedication to rewarding shareholders beyond regular distributions. Additionally, annual share repurchases averaging $33 million demonstrate Winmark’s proactive approach to maximizing shareholder returns.
Though Winmark refrained from repurchasing shares in 2023 due to elevated valuations, the company’s capital allocation strategy exudes prudence and adaptability. By adjusting dividend policies and buyback activities based on stock valuation metrics, Winmark ensures efficient use of investor capital.
Strategic Capital Allocation
During periods of rich valuations, Winmark opts for larger special dividends and reduced buybacks, preserving shareholder interests. Conversely, in times of favorable stock pricing, the company engages in share repurchases to enhance per-share metrics. This dynamic approach underscores Winmark’s commitment to long-term value creation and prudent financial stewardship.
Winmark’s taciturn communications policy, notably void of quarterly conference calls, may deter short-term investors. However, the company’s fundamental strength and adherence to the circular economy megatrend portray a resilient and enduring business model, aligning with investors seeking stable, long-term growth.
As investors contemplate opportunities in the resale market, Winmark emerges as a beacon of success, offering a compelling investment thesis anchored in sustainable growth and shareholder value creation.
One must analyze Winmark’s potential through a holistic lens, appreciating its strategic positioning within the circular economy landscape and unwavering commitment to unlocking long-term shareholder value.
Josh Kohn-Lindquist holds positions in Winmark. The Motley Fool also maintains positions in and recommends Winmark. The Motley Fool upholds a strict disclosure policy.
