Winmark owns 5 resale brands and runs a franchising business model at a 48% net profit margin. Entrepreneurs can operate one of these ‘neighborhood stores’ if they fulfill some requirements, like being responsible for the capital investment. Agreements to run a store last for 10 years and can be subsequently renewed.
Winmark was founded in the 80s and, by the late 90s, it was struggling financially. During that time, management had a meeting with John Morgan, whereby they asked him to become CEO. Morgan accepted under the condition that he would be the only one in charge. Thereafter, he turned Winmark around and shaped its culture.
Winmark’s business used to revolve around selling merchandise to franchisors and opening as many stores as possible. Completely in the opposite direction, Morgan mostly focused on generating revenue with a 3-5% royalty fee and partnering with talented and trustworthy operators. This playbook is the backbone of Winmark’s strategy and has been successfully utilized to this day.
The other major decision Morgan took was starting an equipment leasing business. After 2003, the completeness of the generated cash flow was reinvested into this activity, which got to a meaningful magnitude. When John stepped down in 2016, Brett Heffes succeeded him.
Under Brett’s tenure, Winmark discontinued the leasing operation, thereby liberating all operating cash flow. To deploy it, management adopted a very simple and prudent policy. As much cash as possible gets reinvested in the core resale operation; excess cash is returned to shareholders.
Over the past couple of years, the team has engaged in stock repurchases on an opportunistic basis. If the price is considered unattractive, management analyzes repaying debt and distributing dividends. Regarding the latter, they have opted to stick with a flexible policy. A small dividend is yearly paid and, if there’s excess cash after exhausting other options, special dividends get distributed.
Conclusively, Winmark is a stable, slow grower, with seemingly durable cash flows, requires no capital to grow, and is wildly profitable. With no avenue for reinvesting, most cash will be prudently distributed to shareholders.
Personal Commentary
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Disclaimer: This is not financial advice.