Winmark Corporation Stock Profile

WINA:NASDAQ

With three children in school and sports activities, I have recently fully embraced the wonder of children’s used clothing and sporting goods stores. Giving the rising costs of almost everything, paying retail prices to keep growing children dressed in quality, brand name clothes and shoes is becoming unaffordable for most families. It is no surprise that retail is suffering in many ways and the second-hand clothing market is booming. A recent article by Richard Kestenbaum at Forbes recently outlined this trend and states that the re-sale market is projected to double in the next five years.  

I absolutely agree with this projection. The stigma of shopping second-hand at least for children is largely gone when it comes to buying brand name, like new, quality items. I, along with many mothers I know, are almost exclusively shopping for their children’s clothing and shoes at second-hand shops or online marketplaces such as kijiji (which is huge in Canada but not so much in the US, check out this interesting article about how kijiji fizzled in the US) or local Facebook auction/marketplace groups. The main reason I have moved in this direction is the quality and brands of clothes at second-hand shops is like new. Kids are in and out of clothes so quickly and everything for sale at such stores is in excellent condition. Just yesterday I bought my son a brand new Under Armour winter coat off kijiji for less than half the retail cost!

I was surprised to learn that our local second-hand children’s clothing store Once Upon A Child and Plato’s Closet (focused on teens), as well as Play It Again Sports, were actually franchises of a larger, American public company called Winmark. I wrongly assumed they were small, locally owned stores so I am interested to learn more about the company behind it, Winmark.   

·     As stated many times on this site, I, nor ZSM Creative Inc. operating as The Capital Pink, are financial advisors and have no financial accreditations. I am applying some basic evaluation tools to this stock along with some commentary, but this should only serve as a starter for your further research. The information below is only current to the day this post was written which may or may not be the same day as this post was published so please update the ratios and numbers to the current day before relying on them as they may have significantly changed (see How Do I Evaluate a Stock? (Part One) for information on where to find the ratios and numbers online). Please read my Legal Disclaimer.  Also, I do not own Winmark stock and am not affiliated with them in any manner.    

What is Winmark Corporation?

Winmark provides franchise opportunities for the establishment of gently-used second hand stores. It focuses on high-value, easy-to-find, quality products. The franchises it offers for sale are: Once Upon A Child, Plato’s Closet, Play It Again Sports, Style Encore and Music Go Round (second hand music instruments - I can imagine I will be visiting this store in the coming years as school band becomes an option). It helps franchisors with business plan guidance, site selection assistance, training, store design and layout, marketing, inventory management and proprietary computer systems. Winmark’s teen and young-adult focused clothing store,Plato’s Closet, was recently ranked the #1 Franchise in the $150,000-$500,000 investment level. Winmark also has a leasing and credit arm.

Its financial documents indicate that Winmark makes it money from the following: royalties from franchises, leasing income from its leasing business, merchandise sales, franchise fees and “other”.. Its total revenue to date in 2018 is $55,439,300.00 up from $51,971,500.00 at this same point last year. Net income to date is $22,467,700.00 up from $16,942,100 at this time last year. So Winmark is having a great year and that is no surprise as second-hand continues to grow. 

What is Winmark stock doing?

As at October 17, 2018, the numbers from our basic stock evaluation tools are as follows:

Share price: $155.00 USD

One share of Winmark would cost $155USD.  The price over the past 52 weeks has ranged from $121.55-$187.10. So, it is trading in the middle of that range.

Price to Earnings (P/E): 23.6

Recall this is the stock price divided by the earnings per share. If the P/E is high, you should expect to get some growth for having paid a bit more for the stock however, it could indicate the stock is overvalued. This is a somewhat high P/E but definitely not like a new, high growth company.  

Dividend Yield: 0.33%

Dividend paying stocks are something many investors look to buy as they are like an interest rate on your shares. Dividend payouts are discretionary. Dividend yield represents the amount the company pays out in dividends relative to its share price. While a higher dividend yield is usually more desirable, you still need to consider the health of the underlying company before making a generalization either way. Winmark has paid a dividend since 2010.  

Earnings per Share (EPS): 6.60 TTM

This figure will tell you a great deal about the growth of the company. It takes what the company earns and divides it by the number of shares outstanding. It is essentially the profit allocated to each share of the company. The bigger the number the better because the more the company earns, the more attractive it is to investors. EPS that is increasing every quarter shows earnings momentum and shows growth potential. Winmark has had steady EPS growth in the last ten years. Increasing steadily from 0.21 in 2008 to 6.60 TTM today without any dips. 

Revenue: $72 million TTM

Increasing revenue is a good sign that the company is growing. Like its EPS, Winmark’s revenue has steadily increased over the last ten years from 35 million in 2008 to $72 million today.

Return on Equity (ROE): -

ROE tells you what sort of return the company is getting on the shareholders money. An increasing ROE is a good sign. ROE is calculated by dividing net income by shareholder equity. As Winmark has positive net income, its shareholder equity is in a negative position which results in negative ROE. Negative shareholder equity is something to look further into but it could be do to accounting methods that are accounting for past losses.

Market Capitalization: $597.7 million

Recall that small cap stocks usually have the most room for growth as opposed to large, established, stable large cap companies and medium fall somewhere in the middle. Winmark would be considered a small cap stock. 

Net Profit Margin: 38.41% TTM

This ratio tells us what profit is left over after the company pays its expenses for the year. The more money it keeps, the better. High net profit margins mean that a company is good at keeping profit after expenses are paid, which may mean they are adept at keeping their expenses down. It is a good idea to compare these over an industry to see what companies are good at operating and maintaining a high net profit margin. Winmark has had a steadily increasing net margin and 38.41% is a nice and high figure.

Free Cash Flow per Share: -- 

Recall that this number is the cash flow through the business divided by the number of shares outstanding. It represents the net cash a company can produce per share and many investors consider this a better indicator of a company’s health than the more popular, earnings per share ratio because it is more difficult to manipulate cash flow numbers than it is earnings numbers. A higher value usually indicates the company is in a healthier position. It shows the cash that the company actually holds that could be distributed out to shareholders without impacting the continued development of the company.  

This ratio should be considered along with the EPS figure for a better picture of the company’s health as there should not be a wide discrepancy between the two figures. If there are large variances between those numbers, you may want to consider if there were large, non-recurring one-time items that account for the large variance. It is also wise to look at a company’s cash flow picture in the long term as that should take into account one-time, large capital expenditures (money spent by a company to buy or maintain an asset like land, buildings or equipment, i.e. “fixed assets”) that required large amounts of cash. A low free cash flow per share could also mean the company is earning less profit. There is no figure available for Winmark as it appears cash flow is negative.

Price to Sales (P/S): 9.0

This ratio compares the total market value of the company with its sales revenues. There is not a great deal of manipulation a company can do with its sales data, so this can be a good indicator of how well the company is doing. Recall that a lower ratio relative to its peers in the industry can indicate a potentially good investment opportunity. Morningstar indicates the industry average is 2.7 so Winmark is considerably higher. 

Price to Book (P/B): -

This compares the stock price with how much the stock would be worth if the company was liquidated or sold off. It is the value of the stock in comparison to the underlying assets of the company. Thus, a low P/B relative to the stock price suggests you are not paying too much for what would be left over after such a sell off. Winmark has a negative P/B due to its negative shareholder equity and book value.

Price to Cash Flow (P/CF): 21.5

Having cash left over after expenses are paid off is crucial to remaining in business so this is a good indicator about the health of a company. Generally lower is better as it could indicate the company is obtaining large cash flows not yet reflected in the stock price. Morningstar indicates the industry average is 8.1 so Winmark is considerably higher than this average.  

Winmark is having a fantastic year and I think the company will only continue to grow as the quality second-hand sector gains even more traction. However, these operate as local endeavours given the nature of the products so there are very few barriers to entry to start this type of a store. The benefits of joining a franchise as opposed to simply starting your own store are not entirely clear to me. Case in point, I did not even realize Once Upon A Child or Plato’s Closet were franchises. I am not sure someone wanting to get started with this type of store necessarily needs the brand recognition. In any event, this is a burgeoning market and Winmark is doing very well.