WINA — Q3 2026 Financial Report Analysis

Royalties grew 3.8%, while new franchisee fees started to change what the income statement looks like

Winmark does not run stores itself. It licenses five resale brands (Plato's Closet, Once Upon A Child, Play It Again Sports, Style Encore and Music Go Round) to 1,398 independently owned stores and collects a percentage of their sales as royalties. In the third quarter of fiscal 2026 (the 13 weeks to September 26, 2026), royalties rose 3.8% to $21.7 million and diluted earnings per share rose 6.3% to $3.21. Reported revenue jumped 23.2% to $27.9 million, but most of that jump came from a new Plato's Closet advertising fund. Franchisees pay into the fund and the money is spent on their marketing, so it adds revenue and the same amount of cost, and no profit. This is the first Winmark report on this site.

At a glance

• Royalties +3.8% to $21.7M. Royalties are about 90% of Winmark's revenue once the pass-through ad fund is excluded. Growth slowed from +8.1% in the first half of 2026 (our calculation from the nine-month and quarterly figures).
• Reported revenue +23.2%, but +6.3% without the ad fund. The new Plato's Closet ad fund brought in $3.8M of revenue and $3.8M of matching expense in its first quarter. Excluding it, revenue was $24.1M.
• 1,398 stores, 77 of 77 renewals. The store count is up a net 20 since year-end (35 opened, 15 closed). Every franchise agreement that came up for renewal this year has been renewed.

The numbers

Operating margin is the share of revenue left after running the business, before interest and tax. The "excl. ad fund" rows are our calculations from the filing's line items.

How Winmark makes money

Winmark's business is mostly collecting a cut of what its franchisees sell. Royalties were $21.7 million of the $24.1 million in revenue outside the ad fund. The rest is small: franchise fees (one-time fees for opening a store or renewing an agreement, recognized gradually over the 10-year contract) were $0.3 million; sales of merchandise and technology to franchisees were $1.0 million, at almost no profit (cost of goods was 91.8% of those sales); software fees were $0.5 million; and "other" was $0.5 million.

This mix explains the very high margins. Winmark has no stores, inventory or store staff of its own, so after $7.3 million of selling, general and administrative costs (SG&A: head-office salaries, marketing support and professional fees), most royalty dollars become operating profit.

Management says the royalty increase was "primarily from higher franchise retail sales, and to a lesser extent, from having additional franchise stores." Winmark does not report same-store sales, so royalty growth is the closest available measure. That makes the slowdown the main thing to watch. Royalties grew 6.5% over the first nine months, which works out to about +8.1% in the first half and +3.8% in Q3. The filing does not explain the slower quarter.

Two new franchisee fees, and why they matter more than the quarter

Most of what changed this quarter came from two new charges on franchisees, first announced in a March 2026 8-K:

1. A monthly software fee of $295 per store, which started September 1, 2026. Software revenue rose by $0.4 million in the quarter, which is roughly one month of the fee across 1,398 stores. If every store pays it for a full year, it comes to about $4.9 million (our arithmetic: 1,398 × $295 × 12). That is about $1.2 million a quarter, compared with $21.7 million of royalties this quarter, and it costs Winmark very little to collect. Winmark is also spending money on the system behind it: $2.3 million of capitalized software for a new point-of-sale system, which is not yet in service.
2. A Plato's Closet advertising fund. From July 1, Plato's Closet franchisees pay 2% of sales into the fund. Winmark records the contributions as revenue and the spending as expense. The $3.8 million collected in the quarter implies Plato's Closet system sales of about $190 million for the quarter (our calculation: $3.8M ÷ 2%).

With the Q3 results, Winmark also announced (8-K, October 14) that Once Upon A Child and Play It Again Sports will get their own ad funds from January 31, 2027. Franchisees of those brands will have to spend 6% of sales on marketing (up from 5%), with 2% of sales going into the fund. Based on 2025 sales, the company says those funds would have collected about $10.9 million and $7.0 million a year. From 2027, reported revenue will rise and reported operating margin will fall for accounting reasons alone, while profit is unaffected. Compare royalties and operating income from year to year, and ignore total revenue and margin.

The 10-Q adds a new risk factor about these fees. It says the software fee and ad funds "may increase franchisee operating costs" and that, if franchisees see them as "burdensome, ineffective, or misaligned," it could hurt "franchisee retention, the pace of new franchise development." Winmark's model relies on franchisees choosing to renew every 10 years and on new owners opening stores. The 77-for-77 renewal record so far in 2026 is the number that will show whether this risk is real.

What the headline numbers hide

• Revenue growth is mostly the ad fund. Of the $5.3 million revenue increase, $3.8 million is ad-fund money that leaves again as expense. Underlying revenue growth was 6.3%, and royalty growth was 3.8%.
• The margin drop is presentation, not a weaker business. Operating margin fell from 65.9% to 56.6% only because ad-fund dollars were added to revenue with zero margin. Excluding them, the margin was 65.6%, nearly flat. SG&A rose 4.1%, which management attributes to "compensation related expenses for the Company's investments in technology and marketing."
• Cash conversion is solid. Operating cash flow over nine months was $35.5 million against net income of $31.5 million, or 1.13 times. Stock option expense ($1.9 million) is non-cash, so this is expected. Receivables rose to $2.3 million from $1.5 million at year-end, and inventory roughly doubled to $0.8 million (franchisee technology purchases). Both are small next to quarterly royalties, and the receivables increase lines up with the new fees starting.
• EPS growth came from the business, not from buybacks. The diluted share count fell only 0.2% (3,685,668 vs 3,693,154). Winmark bought back 33,024 shares for $9.8 million (about $298 a share) in Q3, but option exercises offset most of that. A lower tax rate (23.3% vs 23.8%, because of more stock-option exercise tax benefits) added roughly 0.7 points to net income growth. Pre-tax income rose 5.4%.
• The nine-month comparison includes a one-off. Nine-month net income was down 0.7% and EPS was down 1.2% ($8.51 vs $8.61). That is because the first nine months of 2025 included $2.4 million of leasing income, mostly from a legal settlement in the equipment-leasing business, which has since been wound down. The franchising segment alone grew nine-month operating income 6.4%, from $39.3 million to $41.8 million.
• Interest income is falling. Interest and other income fell to $0.24 million from $0.31 million. Cash at quarter-end was $28.1 million, compared with $39.9 million a year earlier. Winmark pays out spare cash as special dividends instead of keeping it.
• Shareholders' equity is negative (-$37.4 million). This is the result of years of returning more cash than the company has kept as accumulated earnings. Debt is $60 million: a $30 million term loan at 4.60–4.75% maturing in 2029, and $30 million of 3.18% notes due in 2028. Winmark is in compliance with its loan covenants. For a business with $40.5 million of pre-tax income over nine months, this debt is manageable. Still, little of the cash stays in the business.

Takeaway: The quarter itself was ordinary: royalties up 3.8%, EPS up 6.3%. The bigger change is that Winmark is starting to charge its franchisees more. A $295 monthly software fee (about $4.9M a year at the current store count) adds almost pure profit, and the three ad funds will add roughly $33M a year of revenue that carries no profit (Plato's at the Q3 pace plus the company's 2025-based estimates for the other two). Watch royalty growth and franchise renewals to see whether franchisees accept these costs.

Outlook

Winmark gives no earnings guidance. Here is what the filing and the accompanying 8-K do say about what comes next:

• Cash returns continue. The board declared a regular quarterly dividend of $1.02 per share (up from $0.90 a year ago, +13.3%) plus a $4.00 special dividend, both payable December 1, 2026. The special dividend comes to about $14.2 million, or roughly half of quarter-end cash. Management says cash on hand, operating cash flow and the $20 million undrawn revolving credit line will cover planned operations through 2027.
• Q4 will be the first full quarter of the software fee (Q3 had only September). Software revenue should therefore step up noticeably from $0.5 million. Plato's Closet ad-fund revenue and expense will continue at about $3.8 million a quarter.
• Store growth is slow and steady: 35 openings against 15 closings so far this year, led by Once Upon A Child (+10 net) and Play It Again Sports (+6 net). Style Encore shrank by two stores.

Our view: earnings per share should keep growing in the mid-to-high single digits in the near term, and the software fee should push 2027 operating income above what royalty growth alone would produce. The uncertainty is royalty growth. It slowed to 3.8% in the same quarter the new fees were announced. If it stays near that level while franchisees of two more brands start paying an extra 1% of sales for marketing in 2027, that will suggest the fees are weighing on the system. If it returns to the 6–8% range, the new fees are a clear gain for shareholders.