Winmark profit rises 6% as royalty growth slows and franchisee fees climb

Winmark franchises five resale brands: Plato's Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round. At Plato's Closet, for example, shoppers sell gently used clothes they no longer wear and get cash on the spot.¹ At December 27, 2025, there were 1,378 franchises in the United States and Canada, and Winmark collects royalties generally ranging from 4% to 5% of their sales. Plato's Closet stores alone sold an estimated $675.5 million in 2025.² Winmark once also ran an equipment leasing business, but that run-off was completed as of December 27, 2025, and franchising is now its one reportable segment.³

In fiscal 2025, Winmark had total revenue of $86.1 million, operating income of $54.6 million and net income of $41.7 million. Operating cash flow was $44.9 million and equipment purchases just $0.2 million, so free cash flow, the cash left after investment, was about $44.7 million.¹ It paid $49.1 million of dividends that year, including a $10.00 special dividend, which was more than that free cash flow.² At the $282.07 close on October 13, 2026, its 3,559,195 shares were worth about $1.0 billion. That is about 24 times trailing-year net income, which comes to $41.4 million.³

The fee changes came in steps. In its first-quarter 2026 release, Winmark called the Plato's Closet ad fund and new point-of-sale software "permanent vehicles to fund ongoing reinvestment in marketing, technology and innovation initiatives."¹ In the second quarter, royalties grew 7.8% while selling and administrative costs rose 13.9%, as Winmark kept spending ahead of the ad fund launch.² Its July quarterly report added a risk factor: the fees "may increase franchisee operating costs and may not result in immediate or uniform benefits for all franchisees." A First Trust fund group reported a passive 5.32% stake in a July filing.³

Total revenue rose 23% to $27.9 million from $22.6 million. Of that $5.3 million increase, $3.8 million was the new Plato's Closet ad fund, which Winmark books as revenue and as an equal expense.¹ Take the ad fund out and revenue grew about 6%. Software revenue rose to $497,100 from $93,100, and the $295 monthly fee, which applies to all locations, only began on September 1, 2026.² Across 1,398 stores, that fee works out to about $4.9 million a year before the cost of running the software.³ Operating income rose 5.8% to $15.8 million. The operating margin fell to 56.6% from 65.9%, but measured on revenue without the ad fund it was about 65.6%, so nearly all of the drop comes from the ad money.⁴ Net income rose 6.1% to $11.8 million, and diluted earnings per share rose 6.3% to $3.21 from $3.02.⁵

The soft spot is royalties. They rose 3.8% to $21.7 million, against 7.8% growth in the second quarter, and are up 6.5% for nine months.¹ The store base still grew: in nine months Winmark opened 35 stores and closed 15, ending at 1,398, and renewed 77 of the 77 agreements that came up. Style Encore shrank to 65 stores from 67, and 79 more franchises have been awarded but are not yet open.² Selling and administrative costs rose 4.1% to $7.3 million.³

The big one-off sits in last year's numbers. Nine-month net income was $31.5 million, just under $31.7 million, because 2025 included $2.2 million of leasing income from settling customer litigation.¹ For franchising alone, nine-month operating income rose 6.4% to $41.8 million from $39.3 million. The quarterly report's discussion section instead compares nine-month franchising income of $41.8 million with $41.6 million, but $41.6 million is the 2025 nine-month total including leasing.² Two costs have not fully reached profit yet. Winmark has capitalized $2.3 million of point-of-sale software that is not yet in service, so none of it has been expensed.³ Stock option pay, a non-cash cost already deducted from profit, was $1.9 million for nine months, and another $7.3 million will be expensed over about 3.8 years.⁴ Cash from operations was $35.5 million for nine months, against $36.4 million a year earlier.⁵

The ad funds are an exchange. Store owners hand over 2% of sales; in return they get pooled marketing across North America, which the chief executive says Winmark and franchisees "have underinvested in" for many years.¹ Winmark keeps part of the money: the funds will cover its "reasonable costs" of running them, including personnel or contractors and "continued corporate investment in marketing activities."² For Once Upon A Child and Play It Again Sports owners, the 2% is part of a required marketing spend that rises to 6% of sales from 5%, so their added required spend is 1 point of sales; the rest is marketing money they already had to spend, now pooled by Winmark.³ Had those two funds run in fiscal 2025, they would have taken in about $10.9 million and $7.0 million, or $17.9 million together, about 21% of Winmark's 2025 revenue. On 2025 sales, the Plato's Closet fund alone works out to about $13.5 million a year.⁴

Winmark ended the quarter with $28.0 million of cash and $60 million of debt. Half is $30.0 million of term loans under a credit facility with CIBC Bank USA, at 4.60% to 4.75%, maturing in 2029.¹ The other half is $30.0 million of Series C notes under an agreement with PGIM, formerly Prudential Investment Management, at 3.18%; they were issued in September 2021 and mature seven years after issue. Winmark itself says the $60 million matures over the next thirty months.² A $20.0 million revolving credit line is undrawn. Lenders require minimum debt service coverage and maximum leverage, Winmark was in compliance at quarter end, and both debts are secured by a lien on substantially all its assets, so lenders rank ahead of shareholders.³ Leverage is low. Net debt of about $32.0 million is about 0.6 times trailing-year operating income of $54.8 million, and third-quarter operating income covered interest expense of $610,300 about 26 times.⁴ Book equity is a deficit of $37.4 million, meaning recorded liabilities exceed recorded assets. Management says cash, cash flow and the credit line will fund planned operations through 2027, but warns it may have to refinance, sell assets, borrow more or raise equity if cash falls short.⁵

On December 1, 2026, Winmark pays a $4.00 special dividend, about $14.2 million, which it will finance with cash on hand, and a $1.02 regular dividend, about $3.6 million.¹ Together with the $1.75 million of buybacks still unpaid at quarter end, that is about $19.6 million, which would leave roughly $8.4 million of quarter-end cash before fourth-quarter cash flow.² Winmark says it is keeping more cash than in recent years for buybacks and the debt maturity, and the special dividend is $4.00 against $10.00 in 2025.³ From August 30 to September 26, 2026, it bought 33,024 shares at an average $298.14, about $9.8 million, and $1.75 million of that was still unpaid at quarter end. Only 37,632 shares, about 1% of the total, remain under its buyback authorization.⁴ Nine-month free cash flow was about $33.0 million, against $10.8 million of dividends and $8.1 million of buybacks paid in cash. Dilution is real but modest: 325,646 options are outstanding at an average exercise price of $255.81, equal to about 9% of shares, and the quarter's diluted share count was 3,685,668.⁵

The bull case: royalties still grow, every renewal came in, 79 sold stores wait to open, and the new software fee adds revenue, while two more ad funds will pool franchisee marketing money that Winmark expects to raise revenue and expenses by matching amounts.¹ Earnings per share grew 6.3% while Winmark paid launch costs, its debt costs 3.18% to 4.75%, and interest is covered about 26 times. If pooled ads lift store sales, royalties rise with them, and the funds may carry some marketing Winmark used to pay for itself.²

The bear case, strongest point first: royalty growth fell to about half the second quarter's pace just as Winmark asks the same owners to send 2% of sales, part of a marketing requirement rising to 6% from 5%, into its funds and to pay $295 a month per store for software.¹ Its own filings warn that strained relationships "could negatively impact franchisee retention, the pace of new franchise development". Style Encore is shrinking, the stock trades at about 24 times trailing earnings, dividends outran free cash flow in 2025, and $60 million of debt comes due within thirty months.²

Winmark states its forward case as goals. It wants the ad funds and the software fee to pay for "ongoing reinvestment in marketing, technology and innovation," and it has delivered a point-of-sale pilot at one franchised store.

Our price file's last close is $282.07 on October 13, 2026, the day before the filing, so the market's reaction to the results is not known yet.¹ It closed at $282.07 on October 13, 2026, down 3.5% from $292.165 on October 12, 2026.² Winmark told its franchisees about the new funds on October 13 but disclosed them publicly only in the 8-K filed October 14, so the drop came before the public news.³ In our price file, which begins in mid-September, its highest close was $305.955 on September 29, 2026, so the stock sits at the bottom of that short range and below the $298.14 Winmark paid for its own shares.⁴ The dated tests are the November 11, 2026 record date, the December 1, 2026 payment of both dividends, and the January 31, 2027 date when contributions to the two new ad funds begin.⁵ Full-year results follow the fiscal year's end on the last Saturday in December.⁶ The bull case is wrong if fourth-quarter royalties, shown in the 10-K expected in late February 2027, grow less than the third quarter's 3.8%,⁷ or if closures outrun openings.⁸ The bear case is wrong if fourth-quarter royalty growth returns toward the second quarter's 7.8% while renewals stay complete.⁹

Winmark gives no same-store sales figure for its franchisees, so we cannot tell whether the slowdown to 3.8% royalty growth came from weaker store sales, timing, or the new fees.

Winmark has not said whether it will repay the notes and term loans from cash or refinance them, or at what interest rate; it only says it may need to refinance if cash falls short.

No filing reports franchisee complaints, disputes or exits tied to the new fees; Winmark's risk factor only warns they may hurt relationships.

Winmark has not reported any sales result from the Plato's Closet fund since contributions began on July 1, 2026.

Our price file starts in mid-September 2026, so we cannot place the stock against its full-year high and low.