Winmark Corporation's Sky-High Valuation Faces Growing Pains

Winmark Corporation (NASDAQ: WINA), a franchisor of resale retail concepts like Play It Again Sports and Once Upon A Child, has seen its stock price surge in recent years. However, its soaring valuation now sits at a precarious crossroads. With a price-to-earnings (P/E) ratio nearing 40—a level historically reserved for high-growth tech darlings—and earnings growth that has stalled, investors may be overpaying for a company whose fundamentals don't justify its premium price tag.

The P/E Ratio: A Warning Sign

Winmark's P/E ratio has skyrocketed to 40.24 as of June 2025, up from 34.6 at year-end 2024 and nearly double its five-year average of 25.61. This metric, which compares stock price to trailing earnings, suggests investors are betting big on future growth. But is that growth materializing?

The data shows a clear trend: Winmark's valuation has decoupled from its earnings trajectory. While its P/E has climbed to near 40—a level typically reserved for companies like Amazon or Netflix—its earnings per share (EPS) growth has stagnated. Over the past five years, EPS has grown at just 8.2% annually, and in 2023, it rose a meager 2% year-over-year. Such tepid growth struggles to justify a P/E ratio that's 100% higher than its historical average.

Stagnant Earnings Growth: A Recipe for Disappointment

Winmark's earnings story is lackluster. Despite operating seven franchise brands in resale-heavy sectors like sports equipment and children's apparel, its diluted EPS for the trailing twelve months (TTM) ended December 2024 was $10.89, barely budging from $10.41 in 2020. Even its peak 5-year growth rate of 13.7% (achieved in select periods) pales next to the valuation multiple it now commands.

The disconnect deepens when comparing earnings to revenue. While EPS has grown at 8.2% annually, revenue has expanded only 3.3% yearly—far below the broader U.S. market's projected 8.7% revenue growth. This suggests Winmark is relying on margin improvements or cost-cutting rather than top-line expansion to boost profits.

Peer Comparison: Overvalued Relative to Competitors

Winmark's valuation looks even starker when compared to peers. Retailers like Walmart (WMT, P/E 39.0) and Dick's Sporting Goods (DKS, P/E 12.35) trade at far more reasonable multiples, while Build-A-Bear Workshop (BBW, P/E 12.71) also trades at a fraction of Winmark's multiple. Even within its niche, Winmark's P/E is an outlier. Investors might question why a franchise operator in a non-cyclical resale market deserves a valuation rivaling Amazon's.

Risks on the Horizon

1. Sustainability of Growth: Analysts project EPS growth of just 3.8% annually through 2026, while revenue growth is expected to lag at 3.3%. Such modest forecasts clash with the P/E ratio's implicit assumption of high growth.
2. Dividend Dependency: While Winmark has increased dividends—most recently to $0.96 per share—the payout ratio (dividends relative to earnings) now exceeds 30%, a level that may strain cash reserves if earnings stumble.
3. Insider Activity: Notable insider sales in recent years, including transactions by executives and directors, hint at cautious confidence among those closest to the company.

Investment Thesis: Proceed with Caution

Winmark's valuation is built on a high-wire act: investors are pricing in growth that hasn't materialized and may never arrive. With a P/E ratio that's 100% above its historical average and earnings growth stuck in low gear, the stock appears vulnerable to a correction.

For investors considering a position:
- Avoid buying at current levels unless you're willing to bet on a dramatic turnaround in growth.
- Consider shorting or hedging if you believe the P/E ratio will revert to historical norms.
- Watch for catalysts: A sustained rise in franchise sales or cost efficiencies could justify the premium, but the bar is high.

For long-term holders:
- Reassess your thesis. If growth remains elusive, it may be time to take profits.

Conclusion

Winmark Corporation's franchise model has served it well, but its current valuation is a leap of faith. With earnings growth stagnant and competition from peers trading at far more reasonable multiples, the stock risks a reckoning. Investors should treat WINA's current price as a warning sign—overvaluation is a heavy burden to carry without the profits to back it up.

Investment advice: Proceed with caution. Consider alternative opportunities in the retail sector with stronger growth profiles or more reasonable valuations.