Why Winmark Stock Plummeted This Week

Shares of leading resale goods franchisor Winmark (NASDAQ: WINA) were down 16% this week as of 12:30 p.m. ET Thursday, according to data provided by S&P Global Market Intelligence.

As of this writing, there appears to be no direct Winmark-related news causing the steady decline in share price. While this lack of news isn't uncommon for the notoriously quiet operator -- CEO Brett Heffes typically only offers a one-sentence comment on each quarter's results -- the 16% drop is eye-catching.

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Ultimately, however, I believe this sell-off stems more from the company's increasingly stretched valuation and the market's worries over recent data on softening consumer spending.

Winmark: Amazing business, lofty valuation

Winmark -- which dubs itself "The Resale Company" -- utilizes a franchise operating model to extend the lives of millions of items, including toys, clothing, sports equipment, musical instruments, and more.

Home to over 1,300 locations, Winmark franchises five store brands: Play It Again Sports, Plato's Closet, Music Go Round, Once Upon A Child, and Style Encore.

Image source: Getty Images.

Quietly becoming a leader in the circular economy, Winmark has been a 130-bagger since 2000. However, over the last decade, the company's sales and net income have increased by only 3% and 8%, respectively, annually.

Over the same time, Winmark's price-to-earnings (P/E) ratio rose from roughly 20 in 2015 to nearly 40 prior to this week's drop.

This combination of below-market growth and above-market valuation left the company vulnerable to a sell-off like we saw this week.

With that said, Winmark tends to be beloved by its franchisees, the communities in which it operates, and its customers -- which is why it remains one of my core holdings.

Still trading at a hefty 34 times earnings, however, Winmark may need more robust consumer spending figures to return to new highs.

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Josh Kohn-Lindquist has positions in Winmark. The Motley Fool has positions in and recommends Winmark. The Motley Fool has a disclosure policy.