Business is booming for Winmark

Business is booming for Winmark Corporation's franchised retail stores, aided by a sagging economy that has sent consumers in search of deals and trade-ins on everything from hockey skates to baby furniture, prom dresses and drum sets.

Winmark, based in Golden Valley, is the parent company of Play It Again Sports, Once Upon a Child, Plato's Closet and Music Go Round, all of which sell new and used merchandise. Same-store sales have surged from 4 to 14 percent among the four retail brands this year. With profit margins on used clothing in the 60-percent range, the market for recycled goods is weathering the consumer spending slowdown better than traditional discounters such as Target Corp., Kohl's and even Wal-Mart Stores Inc.

Yet instead of snapping up new retail concepts or going on a huge growth spurt, Winmark is sticking to a measured growth pace of 8 to 9 percent, or about 70 new franchise locations a year.

That's because Winmark CEO John Morgan is using the steady cash flow from franchise royalties to build a separate and unrelated side of the business: financing and leasing office equipment essentials, such as computers, servers, point-of-sale cash registers and phone systems.

It's a business model Morgan knows well, having built and sold a similar company, Winthrop Leasing, for more than $350 million to TCF Financial in 1997.

Morgan says he's far from abandoning the retail franchise side of the Winmark, but he's convinced that the leasing portfolio could become markedly more profitable. The growth just isn't there yet, he said.

"There's huge demand for equipment leasing," Morgan said. "You just have to be very careful about who you loan money to."

Morgan took over a struggling Winmark Corp. in March 2000, and within a year pulled it back from the brink of bankruptcy. He put franchisees through a more rigorous financial screening process, closed under-performing Play It Again Sports stores, sold off several businesses units and brought in his own executives and board members.

Shares then were trading in the $5 to $7 range. Today, Winmark stock is priced at about $17, down from highs in the mid $20s four years ago.

Last month, Winmark reported that its second-quarter profit more than doubled over last year's -- jumping 116 percent, to $930,500, or 17 cents per share.

When Morgan took over Winmark, he said he immediately saw the potential of the new-and-used retail business, but he also was eager to restart an updated version of his former leasing business, which he said produced a 20 percent return on equity every year.

And like the recession-resilient retail side of the company, the leasing business may prove to be the right concept at the right time. Small and medium-size businesses don't always have the cash reserves to plunk down tens of thousands of dollars for computers and other equipment. Lenders, always reticent to take on riskier loans to such businesses, are even more skittish in today's economy.

Enter Winmark's leasing company, which operates as Wirth Business Credit. Its brokers work with equipment vendors to pull together a lease-financing package that might include copy machines, security systems, even a forklift or car-wash machine.

Winmark funds the leasing business by reinvesting profits from its franchised retailers -- which amount to a cool $9 million to $10 million a year.

"We go around looking for companies that are fast-growing that we think we can help in the beginning," Morgan said. "As they grow and get bigger, so does Winmark. They're not as risky as people think because many of them are venture-capital backed."

But Morgan and his team have put a twist on the leasing concept that he said is unlike any model in the industry. He's turned Wirth Business Credit into a franchise, where Winmark acts as the sole funding source. There are 27 Wirth Business Credit franchises in 56 territories, and they've done lease-finance deals with companies in insurance, health care and technology.

"It's a free sales force," said Clint Morrison, a longtime analyst with Minneapolis' Feltl and Co., who also owns stock in Winmark. "These guys go out there, set up their [franchises], generate the business, and then the credits come back into Winmark. It's brilliant," Morrison said.

Morgan, who hails from Omaha, has been buying stock back from the previous owners at a rapid clip and now controls about a quarter of the company. Winmark remains closely held, however. Institutional investors Bares Capital, of Austin, Texas, owns nearly 13 percent and Minneapolis' Farnam Street Partners has a 5-percent stake.

The company doesn't attract attention from Wall Street investors, and Morgan likes it that way.

"A lot of this thing is owned by John and his buddies," Morrison said. "He's smart and he's made a lot of money in the past with this stuff. So there's a good reason to think he knows what he's doing.

"We just hope he doesn't get hit by a bus."

Jackie Crosby • 612-673-7335