If you go to the Buffett-Munger screener, and sort results by the 10-Year EBITDA Growth Rate, a small-cap called Winmark Corp. (WINA, Financial) floats to the top.
Of course, if you have growing children and need to trade in sports gear every year, you may know the company already. The same goes if you trade in or trade up your music equipment, or children’s, teens’ or women’s clothing. Winmark has developed a chain of 1,150 stores that buy, sell and trade used goods. In addition, it also has a leasing business, which connects electronic equipment companies with small- and medium-sized firms.
Winmark has used those businesses not only to grow quickly but also to establish some other sterling metrics. To get to the Buffett-Munger screener, a company must consistently grow its revenue and earnings, have a moat that will allow it to keep growing, have little or no debt and be under- or fairly valued.
Winmark meets all those criteria and has pulled back after hitting a new high just days ago:
Should you buy it now?
History
1983: Martha Morris starts Play It Again Sports, a store that retails used personal sports equipment, in Minneapolis.
1986: Ron Olson and Jeffrey Dahlberg start a consulting firm, Franchise Business Systems, and Morris becomes a client.
1988: Morris sells the Play It Again Sports franchise rights to Olson and Dahlberg, and the company is named Play It Again Sports Franchise Corp.
1992: Acquisition of Once Upon a Child.
1993: Acquires assets of Music Go Round.
1993: The company is renamed Grow Biz International Inc.; later that year it goes public on the NASDAQ, symbol GBIZ.
1994: Fortune and Inc. magazines list it as America's fastest-growing public company.
1998: Acquires Plato’s Closet.
2000: With the company near bankruptcy, it hires John Morgan as CEO and gets out of company-owned stores; all remaining stores are to be owned by financially solid franchisees.
2001: Another re-naming, this time to Winmark Corp.
2004: Founded Winmark Capital and Wirth Business Credit.
2013: Launched Style Encore and added its 1,000th franchise location.
2015: Reached $1 billion in sales.
2016: Brett Heffes replaces Morgan as CEO.
History based on information at the company Web site and Wikipedia.org.
Comments: A nearly 30-year old company with a history of aggressive growth made possible in part by a string of acquisitions. Not included in this history are several acquisitions that were later divested.
Winmark’s business
Winmark’s principal business is as a franchisor of five retail concepts. In addition, it operates a middle-market equipment leasing business through a wholly owned subsidiary, Winmark Capital Corp., and a small-ticket financing business through another wholly owned subsidiary, Wirth Business Credit Inc. (unless otherwise noted, information in this section comes from the company’s 10-K for 2015).
The franchise operations – with 2015 revenues and store counts – are shown below. All work on the principle of buying and reselling used merchandise that consumers have outgrown or no longer use:
- Plato’s Closet®: $432 million from 456 stores; buys and sells used clothing and accessories for the teenage and young adult market.
- Once Upon A Child®: $298 million from 326 stores; buys and sells used and, to a lesser extent, new children’s clothing, toys, furniture, equipment and accessories.
- Play It Again Sports®: $225 million from 297 franchise locations; buys, sells, trades and consigns used and new sporting goods, equipment and accessories for individual and team sports.
- Music Go Round®: $28 million from 33 stores; buys, sells, trades and consigns used and, to a lesser extent, new musical instruments, speakers, amplifiers, music-related electronics and related accessories.
- Style Encore®: $19 million from 38 franchises; buying and selling used women’s apparel, shoes and accessories. A relative newcomer to the fold, the company began awarding franchises in 2013.
In 2015, all but $2.9 million of revenue was generated domestically, the remainder in Canada where it has 89 franchised stores.
The leasing business involves high-technology equipment and/or business-essential equipment, including computers, telecommunications equipment, storage systems, network equipment and other business-essential equipment. It operates through Winmark Capital Corp. and focuses on deals larger than $250,000, lasting two to three years. It’s not a coincidence this retailer got into leasing; Morgan, who took over as CEO in 2000, sold a successful equipment leasing company a few years earlier.
Comments: Winmark has found a niche in buying and reselling used goods across a range of consumer needs through franchise operators. Along with that it has a second line of business in equipment leasing.
Revenue
First, a look at the bigger picture, which shows Winmark steadily growing its revenue over the past decade:
The following table, from the 10-K for 2015, shows (in thousands of dollars) that royalties accounted for the bulk of Winmark’s revenue last year:
In keeping with the importance of franchising, the company says franchise renewals are a key focus for management. Franchisees sign 10-year agreements with Winmark, and a renewal is considered a key indicator of the health of Winmark’s business. It also reported 100% renewals in 2015 while the percentage has ranged between 96% and 100% over the past three years.
Comments: Winmark has steadily grown its revenues over the past 10 years and has two major contributors to that income: royalties from franchising and fees from equipment leasing.
Competitors
Since Winmark is a retailer, it’s no surprise it reports highly competitive markets (teenage, children’s and women’s apparel, sporting goods and musical instruments). It notes individual franchisees face competition from retailers of new merchandise as well as resale, thrift and other stores selling used goods.
On equipment leasing, the company says it faces significant competition from a wide array of competing organizations, including “national, regional and local finance companies that provide lease and loan products; financing through captive finance and leasing companies affiliated with major equipment manufacturers; credit card companies; and commercial banks, savings and loans and credit unions.”
Hoover’s lists its three main competitors as Walmart Stores Inc. (WMT, Financial), Goodwill Industries International Inc. and Tsawd Inc. (Sports Authority, now bankrupt).
Comments: Interestingly, the list of competitors on the retail side does not involve any major online operations such as Amazon.com (AMZN, Financial). Assuming online is not a factor, then we might also assume the company has so far avoided the biggest disrupter in retail.
Moat
Writing for Morningstar, Todd Wenning notes that Morgan is a follower of Warren Buffett (Trades, Portfolio) and is himself a value investor. Wenning argues that Winmark has a narrow moat: “What makes this franchise model attractive from a moat perspective is that, since each concept has a similar system of recycling lightly used merchandise, Winmark can apply best practices in one concept to other concepts. A competitor focused on just one end market, on the other hand, would likely lack the know-how or coordination abilities that Winmark possesses.”
GuruFocus writer Punch Card Research offers a unique perspective on Winmark, comparing it with the likes of eBay (EBAY, Financial), rather than Walmart, “Winmark operates a marketplace. A marketplace is a type of network where money/transactions flow between two more sides with distinct (i.e., heterogeneous) groups of users on one side. A successful marketplace is one where supply and demand are attracted to the same place. Examples of successful marketplaces include eBay, Airbnb and the New York Stock Exchange. Winmark’s retail segment brings together buyers of used items and sellers of used items in the same way.”
Comments: Thinking of Winmark as a marketplace operator, rather than retailer, makes it easier to think of the company having a moat even if it is a narrow one. Also, keep in mind that the marketplace/retailer is just one part, albeit the biggest part, of the Winmark story.
Growth
As we saw earlier, revenue has grown over the past decade. Taking that a step further, consider growth in revenue per share:
Tellingly, EBITDA (earnings before interest, taxes, depreciation and amortization) per share has grown even faster:
At the end of 2015, Winmark had 1,150 brick and mortar stores, all owned by franchisees. While that’s a sizable number, it is much smaller footprint than other retailers. AutoZone (AZO, Financial), for example, had more than 5,300 stores as of Nov. 19. This suggests Winmark has room to grow its primary business, using its proven business model.
Comments: Winmark has grown both its top and bottom lines significantly over the past 10 years. It seems reasonable to believe that it will continue to grow in coming years since it has both expertise and untapped geography.
Other
Winmark is incorporated in Minnesota and headquartered in Minneapolis.
At the end of 2015, it had 108 employees (most staff are employed by franchisees and subsidiaries).
Executive Chairman: John Morgan, age 74, was the CEO from 2000 until early 2016. Prior to Winmark, he founded and managed a business equipment leasing company (1982-1999).
CEO (and Director): Brett Heffes, age 48, succeeded Morgan after holding various management positions at Winmark since 2002.
Chief Financial Officer, Treasurer: Anthony Ishaug, age 44, has held the CFO title since 2009. Before that he was chief operating officer and chief financial officer of Department 56 Inc. (officer information from Reuters.com).
Ownership
Just one of the gurus followed by GuruFocus has a holding in Winmark, Jim Simons (Trades, Portfolio) with 128,800 shares, giving him a better than 3% stake in the company.
For a small-cap, Winmark has a reasonable amount of institutional investor commitment:
What’s striking here is the amount of insider ownership, very close to two-thirds of the company. This GuruFocus table shows Morgan and the company’s two founders (Olson and Dahlberg) have large holdings.
As for short sellers, they represent a very small proportion of company ownership.
Comments: The founders of the company and its longtime CEO all hold large positions in Winmark while institutional investors (pension and mutual funds, etc.) hold a strong position for a small company.
Winmark by the numbers
Comments: The current price has pulled back from its recent 52-week high; its price-earnings (P/E) is in the mid 20s; return on assets is very strong; it pays a small dividend; and it bought back more than 17% of its stock in 2015.
Financial strength
Winmark receives a mediocre 5 (out of 10) from the GuruFocus system for financial strength, and a rare 10 out of 10 for growth and profitability. With red icons for the cash to debt and interest coverage ratios, we know where to start looking for issues: long-term debt.
Looking further, at the 15-year financials, note that the company was debt-free from 2010 through 2014, and then added $64.3 million of it in 2015 (at the end of the third quarter, September, debt had crept up to $68.6 million).
The cash-debt ratio is 0.37; a company with a ratio of at least 1.0 would be able to pay off its debt with cash on hand. Further, Winmark’s debt load is a bit better than that of its peers, according to GuruFocus:Â “Winmark's cash to debt is ranked lower than 61% of the 945 companies in the Global Specialty Retail industry. (Industry Median: 0.71 vs. NAS:WINA: 0.37)
Also of note in the financial strength summary:
- Piotroski F-Score: 9 out 9 (highest possible score).
- WACC vs ROIC: 5.73% vs 166.30%.
Concerning the latter, GuruFocus observes, “As of today, Winmark Corp.'s weighted average cost of capital is 5.73%. Winmark Corp.'s return on invested capital is 166.30% (calculated using TTM income statement data). Winmark Corp. generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns.”
Revenue has grown as this 10-year chart shows:
Earnings are up as well; this chart shows the growth of EBITDA:
Free cash flow, on the other hand, has bounced along within the same range:
Tiingo.com gives us this breakout of cash flow for the most recent quarter (ending in September):
And, Punch Card Research writes, “It’s true that free cash flow has been essentially flat for the past five years. Somewhat oddly, as the chart below shows [read the original article to see the chart], the main driver of the stagnation has been taxes and interest. (It is important to note that FCF on a per share basis has risen by a 4% CAGR due to buybacks.)”
Comments: While Winmark has some long-term debt, it is not enough to take away from its perfect Piotroski F-Score. Revenue and earnings have also grown while free cash flow has marked time over the past decade.
Valuations
Winmark is a 4.5 out of 5-star stock for earnings predictability or consistency. Over the medium to long term, it is more likely to earn a capital gain for its investors than lower ranked companies. In addition, the odds of a stock losing money decrease as its rating increases (and vice versa).
The DCF Fair Value calculator at GuruFocus sees Winmark as being 10% undervalued (after the close on Dec. 22):
The company’s P/E ratio is relatively high but comfortably within the range it has established for itself over the past decade:
GuruFocus notes, “Winmark's P/E Ratio (ttm) is ranked lower than 64% of the 677 companies in the Global Specialty Retail industry. (Industry Median: 20.39 vs. NAS:WINA: 25.59)”
The PEG (price-earnings divided by earnings growth) is also within the range it has established in the past few years:
With a PEG of 1.55, Winmark is in the middle of fair-value range (a company is considered undervalued if its PEG is 0.99 or lower; fair valued between 1.0 and 1.99; overvalued if above 2.0).
Comments: The data and information available for Winmark suggest it is a fair-valued company.
Conclusion
As we’ve seen, Winmark hits all the bases demanded of a Buffett-Munger stock, no small feat for a small-cap. It also has the distinction of earning a full 9 points on the Piotroski F-Score, again a significant accomplishment.
But this stock will make the short lists of only selected investors. Obviously, it will not be of interest to income investors since the dividend is small, and banking on capital gains from small caps is always risky.
Value investors have not yet seen enough of a dip to make this one of their candidates despite the company having a fairly clean balance sheet (some debt but not enough to keep it out of the Buffett-Munger screener or top Piotroski rank).
Growth investors and investors looking for good prospects in a solid small cap may wish to put Winmark on their short lists. This company has flourished since flirting with bankruptcy in 2000 and likely has much more growth ahead.
Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the next 72 hours.
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