Chit Chat Stocks - Winmark (WINA) with Jim Gillies

Episode Date: August 11, 2022

Winmark is a franchisor of retail stores across the US and Canada. You may have heard of Winmark's many brands: Plato's Closet, Once Upon A Child, Play It Again Sports, Style Encore, and Music Go Round. Listen as Brett and Ryan ask Jim questions about the company, its business model, and valuation. Enjoy the show! ***************************** This episode is sponsored by Stream by AlphaSense, the highest quality expert network library. Sign-up here and get a 14-day free trial:  https://streamrg.co/CCM ****************************** Access our “Not So Deep Dive” episodes by signing up for CCM+. Sign-up directly through Spotify or Apple Podcasts. If you listen on another podcast player, use this link and create a private RSS feed: https://anchor.fm/chitchatmoney/subscribe Need more information? Check-out our launch newsletter: https://chitchatmoney.substack.com/p/welcome-to-chit-chat-money-plus ****************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested to see more of Jim's work? Follow him on Twitter here: https://twitter.com/JimPGillies?s=20&t=_VLTZa6G8u2S3-Qzp1QjMg Contact us: [e-mail] Timestamps Winmark | (3:08) Financials | (17:33) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Welcome to Chit Chat Money. This is our Thursday deep dive interview where we interview an analyst on a single stock. And today we are talking with Jim Gillies, four-time guest, pretty much a recurring guest at this point. And we're talking about Winmark. He always brings very unique companies and there are some that we've ended up owning later on, some of the companies he's pitched previously. So it's always fun to listen to him and hear the stocks that he's talking about.

And today we've got a pretty unique retail concept. Do you have any highlights from the interview? Yeah. Yeah, you mentioned it was a win mark for anyone referencing they had played against sports, which people might know about, but a lot of unique secondhand concepts. And I just thought the discussion around the combination of people with a good history of capital allocation management you can trust and then a high margin business that is recession proof-ish was very enticing for a stock. Yeah, it's a good example to look at for capital allocation history and to see what good management teams, where they spend money and how they return it to shareholders. But we'll let Jim talk about that more. So without further ado, here's your interview with Jim Gillies. welcome to chit chat money on this show host ryan henderson and brett schaefer interview industry experts and riff on the world of investing as a quick reminder chit chat money

is a ccm media group podcast ryan and brett are also general partners at arch capital and arch capital may have positions in the securities discussed in this podcast anything discussed on chit chat money by ryan or brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. Today, we are joined by, we talked about it before we hit record, I think fourth time guests now. The previous episodes have been Nelnet, International Petroleum, and RCI Hospitality. So if you want to, if you enjoy this one and you want to listen to more, there's plenty in the catalog. But today we are talking about Winmark. So Jim, welcome to the show. How did

you even find Winmark as an investment? That's a good question, Ryan. Yeah, I've I found Winmark 2008, 2009. And I bought it as soon as I found it. So I've been a shareholder. I'm going to go 2009. Let's just put the pin in there. I bought it as soon as I found it. It was one of the best stories I ever came across. And including dividend, just to set the bar, you know, right out of the gate. Because you mentioned those other three names that I've talked about on the show previously.

Two of the three have been pretty decent returns. And one's still okay. but you know two of the three kind of eclipsed it but i think this one as well i think you're gonna like this one um uh i when i bought it in 2009 i'm just looking at my spreadsheet here my annualized return since purchase including dividend reinvestment is about 22 i'll take that so that's okay so that's okay um but i found it because uh if you go back to 2009 um the world was it was done falling apart, but we didn't really know about it at the time. The market in the wake of the credit crisis kind of bottomed in March of 2009. And then for the next few years, everybody

was waiting for the other shoe to drop as the market climbed inexorably higher. But I found WinMarket at that time because I thought it was a pretty good concept as a recession-proof business. and so the more things change the more things stay the same it kind of feels like that's where we are now um and and so you know i i thought this was maybe kind of timely to talk about it uh when you invited me back to the show okay and uh i will say it seems like from nelnet to this you seem to like companies that are very discreet and i i was looking at winmark um and the only comment it's a four-page quarterly result and the only comment is a quote from the ceo that says we are pleased with our results so it's not the most talkative management team in the world but no why don't uh

go through i guess the the business does various concepts well first of all thank you for calling my other picks discreet because one of them of course is a publicly traded strip joint company in rci hospitality so um i don't think i've ever been told that that company is terribly discreet but moving along um so windmark it came one of the reasons that it came across my my radar back in the day and i like it to this day never sold a share um it's first off it's a franchising business they franchise five different concepts okay uh play it against sports uh i'm sorry and and all of these five concepts are all kind of focused on resale of gently used goods if i can put it that way so play it against sports is used and new sporting goods you know um i'm a skier

with my kids my kids i'll grow their old skis i take their old skis to play it against sports get a few bucks, use that to buy new skis for them. You can do hockey gear, baseball, whatever. Let's play against sports. Plato's Closet is kind of teen and young women's clothing, more of a fun kind of non-professional style, if you will. Once Upon a Child is for gently used children's clothing and related gear. You may have heard kids kind of grow quickly. So all those wonderful clothes you get for them they're out of them in three months you need new stuff you go sell it at once upon a child uh music go round is for musical instruments you decided you were going to pick pick up guitar then you realized you have no talent for it go sell my guitar again

and then finally style encore which is uh also primarily focused on women's clothing but unlike play-doh's closet which is more teen and kind of fun fashion uh style encore is more women's business and casual so kind of the professional maybe older woman would go to style encore Or the younger kind of, you know, going out and more less professional vocations would go towards Plato's Closet. But so those are their concepts. And then they have but they don't actually run the stores. They franchise them. And I love franchising models because the beautiful thing about a franchising model is I sell you a system. I sell you, you know, the computer system and all the pricing info you're going to need. I sell you and you go handle taking out the lease for your store and you go handle buying actual buying and selling and putting up the capital to do the actual buying and selling.

And you're just going to send me a royalty every month. Three to five percent, I believe, is where Winmark generally prices their their concepts. But, you know, these these are basically check cashing machines. Right. Like, you know, my business, I I bring in your cash and I cash the check every month and then you send me another one next month. It's a great business because it allows me to offload the operational risk onto you. Now, of course, where where my skill set comes in, if I'm Winmark, I have to pick good franchisees. I have to pick people with, you know, the business savvy, the capital to to handle this and to run it. And I've actually looked like I the style encore in my town actually came up for sale earlier this year.

And I kind of a bit of jokingly, I called them up to see to see what was required if I wanted to buy the franchise from the present franchisee. And we talked a little bit about it. I thought it was interesting. I was a little overpriced, but but as soon as they said I was not going to be, I would just be an equity purchaser. I would not be running the store. They shut down the conversation almost immediately that we are not interested in investors. We need an owner operator. If you're not going to be an owner operator, thank you for your interest, but we will move along. There was no debate there. So anyway, franchise model concepts that are focused on resale goods. Okay. So in a recession, in more tough economic times you can see how some people might be trading down the i'm not going to

buy new clothes or new sporting goods maybe i can save a few bucks by going used so you kind of you know get the inherent argument there but then i actually realized this now this is going back to when i found the company um and i believe what what got my attention on the company was the then CEO. That's a guy named John Morgan. Now, Morgan is out now, but the culture he built, I believe, persists. So Morgan comes along in around 2000. Okay. And he is appointed chairman slash CEO, I think middle of that year. He immediately goes and buys 13% of the company for $7 a share from the then departing CEO. The price last I looked was about $220 a share today. So Morgan did okay. He buys 13% of the company from the departing CEO, $7 a share.

And then from 2000 to 2014, he purchased... And you can go check the veracity of what I'm saying. It's all on the SEC website. All the beautiful Form 4s, everything. Morgan goes and buys shares on the regular from 2000 to 2014 in the open market, sometimes multiple times a month until he gets up to owning about a third of the company. Okay. And what's that old aphorism about insiders may sell for many reasons, but they tend to buy for only one. And so, but if I then started doing a little work and looking into, well, who is John Morgan? Like, who is this guy? And then I found out that he had started a small equipment leasing business in the early 1980s and sold it for an eight-figure personal payday in the late 90s. So it's not like this guy needed the money, right?

But then I also noticed at the time, or as I'm reading through at the time, Winmark had started a small ticket leasing business inside of all of these franchising business i'm like okay this is just john morgan playing to his strengths having a little bit of fun by the way morgan is now out we'll get to that in a minute but i will say that uh i think it was last year they announced that uh they were letting the lease portfolio run off because morgan's gone now so they're not doing that anymore uh but there's a little bit of lease stuff still kind of around the edges anyway um so morgan he's ceo for for 15 years ballpark he's buying all the way up how do you if you're the ceo of this company and you own a third of the company how do you

make an exit strategy when you are approaching 80 right and the answer is win mark because one reason why i like franchising business with a franchising business make a lot of cash and there's not a lot of not a lot of like look they're low capital and and generate a lot of cash and low capital required and so what what can they do with all the cash they generate well what they've done one of the things they did was they decided to buy back their own shares and uh since i purchased this in 09 to today i believe they bought back roughly one-third of their shares okay but one of the ways they did this was the company would announce a tender offer And I'm going to make up the prices here.

The prices are wrong, but the concept is right. So let's say the stock was trading at $150. Winmark would do a, we're going to buy back X shares at a tender offer. We're willing to pay $140. No one in their right mind, no one who can do basic math is going to say, cool, I can sell into the open market at $150 or I can sell to the company for $140. Let me think about this. No one's going to do that. Right. So no, no outside shareholders would tender. And then John Morgan would tender all of his shares.

Gotcha. So he's selling back to the company at a discount and that's that's both beneficial to the company and it's beneficial to Morgan. It was a win win. And if you again, you go through the history of John Morgan with Winmark is almost 20 year history. He was always about the win win. At least that was my outside perspective. You know, how can shareholders when it's what do we call that conscious capitalism? We're trying to take care of all stakeholders. You know, I thought he did a really good job of that. And so so here is Morgan. He finally got out.

I believe he kicked himself up to chairman in 2016. I think he's out in by 2019, 2018. But the people who like the CEO, Brett Hefas, is is his handpicked guy. He was there forever. The CFO has been there since 2008. President of HR has been there since 95. The franchising president's been there similarly. There's a lot of long-tenured people in there who've got the John Morgan experience.

And so what have they done since Morgan's departure? They've continued buying back a bunch of shares. Like I said, they've reduced 32%. But the other thing that's really interesting to me here is, so when I bought it, they didn't pay a dividend. Okay? I bought it in 2009. There's no dividend. I think my average cost is about $21 a share. 2010, they introduced a dividend, $0.02 a quarter. Whoop-de-doo. Who cares? Next year, they bump it to $0.03 a quarter. Next year, they bump it to $0.04 a quarter.

Next year, to $0.05. Then I believe it went to $0.07, then to $0.10. I think it got to $0.15 at some point, but they've continued bumping up. Today, it's $0.70 a quarter, $2.80 a year, which is about 1.5% yield on the present price, but the long-term shareholders have made out like bandits. The other thing they've done is they would declare a series. Remember, this generates a lot of cash, not a lot of capital to run the business. They've declared a series of special dividends. I believe since 2009, since they started doing their dividend, in addition to the dividend, it's gone from $0.02 a quarter to $0.70 a quarter. They have paid out, I believe, it's $20.50 in special dividends as well. It's been a lot of fun to hold this one.

it's been a lot of fun to watch it and i don't see uh my biggest fear for this company is actually not to do operationally my biggest fear for this company was they appointed a board member last year who's a private equity guy i'm like oh crap are they gonna sell it to private equity because that'd be a disaster for me in my opinion but um no it's been it it's been a real interesting company and it's if i may be so bold it's really only the kind of company if you kind of like you know you've got that long-term that long-term you know mindset that long-term mindset of dealing with people you trust and i very much trusted uh john morgan and i've i've come to trust uh brett hepps as well uh but uh you know in terms of his his man but you know because i like the

fact that he came up under Morgan. But, uh, you know, Morgan is, I think John Morgan is one of the, I believe it's from Minnesota. One of the great underappreciated, um, CEO stories, success stories, I think of, of the two thousands, like, cause unless you, unless you know, windmark, no one's ever heard of them. If you're listening to this ad right now, we know you're already a listener to our show, but for our avid listeners, we've also started a paid membership service called chitchat money. Plus that extends beyond just our podcast. Every Tuesday subscribers get access to one not-so-deep-dive research episode that covers everything you need to know about a company. You also get an email newsletter with our written show notes, important charts,

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Sign up and become a Chit Chat Money Plus subscriber today. We can't wait for you to join our community. Right. It doesn't seem like this company is trying to get their stock to pop by juicing adjusted EBITDA. Far from that. I don't think they report adjusted EBITDA. Exactly.

Exactly. Exactly. So why don't we get some context on the unit economics? I think people might be interested in getting a few numbers there on, you know, what are they bringing in in revenue and kind of what are their margins there? And I guess the next. Well, we'll have follow ups to that, too. Let's just start with that. I'm just looking for looking for that part of my spreadsheet. So here. Yeah. So I don't know specific at the unit economics, the unit level, because, again, that's at the franchise level or at the franchisee level. But at the franchisor level, at Windmark's level, what I watch is just what's the total royalties plus franchising fees, okay? And so a Plato's Closet, the average Plato's Closet in the most recent year, 2021, brought in just about $55,000 in royalties and then spread whatever – I think they opened a grand total of four stores.

So if in 2021, four of those Plato's Closet stores, if they got, say, $40,000 or $50,000 initial franchise fee from each one of those, it doesn't really move the needle that much. But spread that needle across the entire store base, which was 489 stores, Plato's Closet at the end of the year, it's about $55,000 per store in royalties. plus a little kicker for a franchise uh and that's the that's their highest concept and uh you know it's also this concept with the the largest number of stores uh and then once upon a child but 47 000 played against sports was just over 46 style encores but 38 and music go round which is the smallest number of stores only 37 stores is uh but 35 000 bucks um per year uh but but it's incredibly high margin like the the free cash flow margins here on the uh that's on a different slide let me pull that up um the free cash flow margins here are tend to run along

oh that's that's revenue here we go um free cash flow margins sorry now it's not uh working here Free cash flow margins are low 40s. You know, 2020 was about 43. 2021, I think, was about 46, 47. I mean, you know, it's hard to argue with that because they have so few costs at the parent company level. So when, you know, when I get on average from a Plato's Closet, I get $54,000, $55,000 in royalties for the year, you know, 25 to 30 of that's just dropping right to free cash flow. And the interesting thing is, in 2021, all of their concepts were up about, all of their concepts probably averaged up about 30%. uh playing against sports was up about 22 everything else was over 30 uh so you know

they're now a lot of these stores were closed for good chunks of 2020 we know why but the uh you know people come back and need to spend on you know these things uh so you know i i i'm not sure what the store level margins are but i'll argue from uh and look they're successful because they've got 1,293 of these things, and I think they've got another 46 franchises already granted, but they haven't been started yet. And they claim they have 2,800 additional territories that they can award.

We'll see. They tend to be fairly slow growing, but it masks that because they get all this cash coming in and they deploy it in service to shareholders. I don't really care about what the unit level economics are, the unit level profitability, because as the franchisor, you're paying me off the top. And so I care about your store level revenue and store level revenue, like I said, 2021 was looks like ballpark 30% up year over year. That's pretty impressive. uh i think probably over the longer term if i make you know inflation plus a couple of points

at the store level this is this is a home run for windmark so that's my that's that's that that's my kind of approach looking at the store level stuff i don't worry that much about it but you know i just want to see it going in the right direction yeah don't you wish you could just hit skip on the worst parts of your life you know the same way you can skip an ad i get it i'm siaya and i live in ice cove i've made some questionable decisions that didn't end up the way i planned and today i'm still figuring it out somehow things usually get worse before they get better apparently that's how i roll so bundle up and come along for the bumpy ride stream a new episode of north of north tuesdays on cbc gem i guess it's sound i mean

I guess the best way to know whether or not the economics are good at the store level is whether the franchisees stick around and they keep growing locations. And it seems like that's the case. In terms of the concept, I guess I kind of want to know a little more because I haven't been into any of the stores. So you bring in, let's say like Play It Against Sports, you bring in like an old used baseball mitt or something like that. they give you they give you the option for in-store credit or cash is the cash usually at like a discount to the in-store credit and i kind of okay so i think i've got that then the uh in terms of growth is windmark i mean does windmark need to grow what have they grown at like historically you said they got i think it's 1200 something stores all around us and canada

what uh yeah the store count yeah the store count the last quarter last reported quarter was 1293 um and then um again 46 franchises have been awarded uh but are not um are not yet operational or functional uh and then they've got these massive number of uh of territories that they could grant um you know we'll see i i so i'm gonna say something maybe that's a little bit controversial occasionally but it's actually how i run my investing um and it can be sometimes a little bit uh it's counterintuitive uh you guys know and maybe some listeners if they remember me will probably also know uh i don't really care about growth that much uh i like growth growth is a component of valuation, of course, growth is should be function factored into anything you

look at. But the history of investors wildly overpaying for growth is long and painful. And so I don't like playing games, I can't win. So, you know, the the number of times I had to sit through some uh investor with uh less than two years experience shall we say in the last few years uh preaching at me about the virtues of paying 30 times sales for insert uh terrible growth company here um those people are awfully quiet nowadays i'm not too sure why you just hate innovation jim yeah uh i like money ryan it's funny i like cash and so um the long run you know if if win mark gives me three to six percent top line growth a year and it's probably going to be a little bit higher than that this year uh because there's built-in

inflation protection here right like you're going to buy that used baseball mitt that brett took in And, you know, they're going to price it higher because they can, because they can price it at whatever the going inflationary rate is. If you can give me three to six percent annually from Winmark, we're all going to be real happy. And here's the thing. And I was actually saying this, of course, my day gig is Motley Fool talking head. um but and i was talking about this on on a show recently and i'm just like you know given the choice between um given the choice between two companies i'm gonna give you the false dichotomy here um one one company is trading at 50 times sales with revenue growth say of 40

and another company is trading at you know five times cash flow growing sales at two or three percent you know which one has more downside risk like you know if sales drop by 50 percent that first stock's going to get destroyed and the second stock's not going to notice right and yeah and so well i mean like you know if if you're expecting two percent growth trading at five percent five five uh five times cash flow do you particularly care if they put up one percent growth, which is a 50% underperformance from the 2%, you don't care. And so if you can find these slow top line growers, but that are generating a ton of cash and deploying it in the service of shareholders, meaningful buybacks, not just trying to sop up dilution, but actual real

meaningful share of purchases, ideally purchased at good prices, but that's almost asking for too much um and just steady as she goes and and people you know like don't not a lot of not a lot of forced error like no unforced errors like not not blowing capital just for the sake of blowing capital not building you know giant uh new hqs because they can just you know like when windmark is still run out of you know the midwest and you know you give me three five percent a year i'm good man like like on the top line because that translates you know uh over the past five years windmark has done about three percent just over three percent annual top line growth uh but 3.1 but it's but its earnings are up or it's sorry its net income is up 11.7 because of operating

leverage and their earnings are up 15.6 so that three percent top line turns into 15 plus bottom line growth and that's because of that share response and then and then that translates into uh again it's a very uh because it's so cash generative low capital franchising businesses tend to have to tend to be awarded higher multiples anyway because the the quality of the cash stream is so high so you're not you're never going to get windmarked for five times cash flow sadly what if we did if we did i'd probably mortgage my house what uh what are the costs at the corporate or at the win mark level is it just people yeah that's a rent for your office building um there there is uh uh there's a little bit of um like in the most recent quarter uh 19 million

revenue uh 1.2 million of that 19.1 million revenue 1.2 million of that is uh is leasing income so i mentioned that that runoff lease portfolio uh and so there's about 300 000 of expenses of that that's going to go away so ignore that but you basically got um four sources of uh revenue you've got royalties which is by far the largest share uh then you've got uh merchandise sales because they do actually uh sell to the store sometimes they'll they'll buy and sell into it and that's that's fine it's not much but it's there uh and then franchise fees and then the ever popular other revenue um but then costs aside from you know there's the cost of merchandise sold so they've got some sales they sell to the stores they buy some of the goods it goes it flows it

flows through windmark's income statement um they're not making much premium on whatever they buy just to sell into their franchises you know they look like they're maybe making five percent who cares um the franchise fees of course are pure cash pure gravy um the ever popular other is just whatever that is um and by far their largest um their largest expense is basically just you know sgna and sgna is your rent your people and then whatever you need to get those people you know to you know your computers and whatever but um it's it is a very it's a very high quality cash stream in the right hands and i happen to think that this this group is in the right hands right and we're going to talk because you mentioned the importance of capital allocation

uh and management we're going to hit that at the end again uh but one more question on i guess the industry and the specific business model people are well i guess there's the debate about whether we're in a recession but either way the economy what a recession is yeah the economy is slowing down let's put it like that compared to 2021 um we're definitely in a at least in the short run uh or at least for the last year or so been in a stagflation environment and looking at windmark It seems like this is the ultimate insulator from stagflation because, and this might be a weird comparison, this feels similar to Visa and MasterCard where volumes might grow, their costs are going to go up, and all the expenses and all the input costs, they might be at the franchisee level. Is that how you think about it, where they're super insulated from any sort of inflation, any sort of input costs, all that stuff? Yes. That's my shortest answer ever. Yeah, no, look, there's no reason why they can't pass along. If Ryan's used baseball mitts are now 10% higher or inflation is 10% higher, there's no reason why I can't price it at 10% higher at the store level.

And again, as the franchisor, I'm going to encourage you to price things, you know, you've got pricing power because people are already downshifting. I mean, you know, in a high inflationary environment, we're currently in the highest inflationary environment we've seen since, you know, well, 40 years ago. People are already feeling strain. We've seen that from retailers across the spectrum of, you know, Walmart, Target, SayHi. People are already trading down to used goods or willing to go to consignment goods. And these guys have five really, well, okay, four plus Music Go Round, I suppose. I don't mean to dog on Music Go Round, but it's kind of irrelevant. But they've got five high-quality concepts where you can actively trade down.

and if prices are 10 higher because inflation has dictated prices be 10 higher you're still going there because you're looking for the deal so a high inflationary environment my perspective is that it's you know in high inflationary environment i think these guys can weather it recessionary environments i think it actually sends more people in the direction of these types of businesses um than would otherwise be there in you know wonderfully uh growth times wonderful growth times the other thing is you know and i'm gonna i'm gonna join you and kind of um i don't mean to to dismiss the pain that recession can mean for for some people i i don't that's not my intent but as an investor and i have to bring an investor's perspective here um did you guys

miss at the start of this show and this is not for my own notification it's just for a uh as an example. I bought this at a time when we were just past a recession or certainly a major financial crisis. Everyone was looking to fight the last war. Everyone was waiting for the next shoe to drop. Morgan Housel, who I know you guys know, he's got a slide in one of his decks when he gives presentations showing the stock market all up and to the right. He overlays it with headlines, you know, end of 2010, the easy money has been made. End of 2011, the easy money has been made. End of 2012, the easy money has been made. And so all the way up is, you know, people are looking to fight the last war. And so I bought this at a time when recessionary fears were real.

and it's been a wonderful wonderful investment and you know and my point of this is you know you don't realize it at the time or you're not gonna you're not gonna fully grok it at the time if i may use a uh a sci-fi term there um but the the thing that the companies that you buy well during times of recessionary fears are probably going to be among among the best if not the best investment you are going to make in your lives and you know win mark for me i mean you know i'm closing in on what 14 15 years now of 22 plus annualized returns um i think that's okay and i and i bought a meaningful stake so you know i i'm i'm quite happy with the results there but more Moreover, I look today at this company, I see no reason that the gravy train is going to fall off.

They've got lots of room for growth. I don't particularly care about fast growth, as I said. You give me 3% to 6% annually, I'm laughing. um and management has a demonstrated track record both under morgan and now under brett heffs of doing intelligent things for shareholders with the money they generate what is not to love and so i and like i mentioned too like that dividend's gone from two cents a quarter to 70 cents a quarter it's still only about i'm in a ballpark it's only about 25 percent of their free cash flow. Like, if you think that dividend is done rising, I will take the other side of

that bet. I think that $0.70 a quarter dividend, there's no reason it's not $1, $1.50 in five years. And you may have mentioned this, but I don't know if I caught it. What's the yield on that right now? Just kind of give any- It's about one and a half. This is actually one of those conundrums, right? Because like, are you a dividend investor or are you a dividend growth investor because uh you know of course you know where where my day job is uh the motley fool we've got you know various products for various people uh what uh some some of them are a dividend investor product and you know and we've kind of put this in front of people and said you know do you want like a do you want a high yield now you're like four or five percent now or are you okay with one

percent now but you know the company has a history of just jacking their dividend every year such said it might be one percent today but in 10 years you know at the rate they're increasing it windmark is one of these i've got a few other tickers in mind um you know in five years the yield on your on your purchase price today is going to be north of 10 yeah like and it's funny the number of people like no no i want to get paid now and i'm like oh we we can do that um but uh uh yeah i don't know yeah like um you know something you know something that is well okay on on my cost basis this is what 14 percent right and sadly for me personally mine's in a taxable account so you know if i did sell it i'd be writing a nice check to revenue canada um but

until then um you know i'm quite happy to take take the proceeds and and people say well you You know, you shouldn't think of it that way. I'm like, yeah, I understand the financial textbook argument is, no, the yield is the yield today at this moment. But, you know, the psychological impact of saying, yeah, I'm getting 14% of my money back every year, and it'll probably be 15, 20% within a couple of years. Oh, and they throw a special dividend at me. And oh, by the way, they bought back a third of their shares the past decade.

And so they're just the share price is getting ratcheted up as well. Oh, and it's still you can still get this company for well under a billion dollars. like all of these things have me going like by the time main street notices this story it's been a multi multi-bagger for the people who have been in for the long term okay two-part question what does the valuation kind of look like today and then what it sounds like there's really only two places for them to allocate capital because it doesn't really seem like investing internally doesn't really there's not really anywhere to invest as the franchisor so i guess it's dividends either recurring or special and then repurchases which do you like

to see them allocate the most to or is it do you like sort of the blend of all three and then kind of can you give context valuation okay um valuation wise feel free to run your own dcf I think I have a 41.3 million trailing pre-cash flow, my estimate. You can run it out. I think you'll be – you don't have to take heroic assumptions to meet today's share price, number one. If you prefer multiples, I can perhaps scare you by telling you it's trading at 10.5 times revenue. I throw that number out deliberately. because the reality is because it's such a high margin cashflow stream,

the price to revenue, first of all, I've always hated price to revenue. I hate, I've hated it. It was barely ever used before three years ago. Can't imagine why again. But it's, it's, it's, it's among the more useless valuation metrics, in my opinion. It's trading right now. With a price-to-earnings ratio just a tad over 20, it's trading enterprise value to free cash flow ratio just a tad over 20 times, which is cheaper than it's been in a year and a half. uh we'd never call it conventionally cheap but it's you know it's from its own history it's on the um in the last five years aside from pandemic bottom which we'll throw that out because that was

a weird time for everybody um it's on the lower it's in the lower third of its range i think lower 40 of its historical range but it's never gonna you know if you're if you're looking to buy this one for five times cash flow good luck uh you're gonna wait a long time um i am i'm actually fine with the valuation today the there's actually i'm going to say there's three things these guys can do with their cash you've hit the first two dividend regular plus special uh buybacks um they've also uh they they don't mind taking on a bit of debt sometimes to kind of front run their their repurchase plans like so i mentioned earlier when when john uh john morgan was you know the only participant or the only participant of size um going into some of

these below market tender offers the company was throwing out um you know quite often they just they tap their credit line they've got a good relationship with their with their financiers um they just tap the credit line or or whatever and they buy back stocks and then they you know they take their foot off the gas pedal of share buybacks for a couple of quarters, pay down the debt, bring the leverage back well below one times net debt to free cash flow, and then maybe they ramp it up again. So right now, they're actually in a ramp up phase. Their leverage as of those recent quarters is about 1.6 times net debt to free cash flow is kind of how I measure their leverage uh so their net debt most recent quarter is about 66.7 million trailing free cash flow 41.3

uh 1.6 is it's in the higher end for them uh certainly the the but but it's not the highest they got up to two and a half almost three times uh net debt to free cash flow during the john malone um tender offers a couple there and then he's john morgan sorry john malone i was like cut that let's go back there yeah no malone doesn't have any part of this that i know of um yeah i know john morgan uh so you know at at 1.6 it's certainly been almost double that before um i wouldn't complain if they took a couple of quarters as they've done in the past throw the cash flow on the on the the the credit line get it back below one and then kind of you can go off to the races again um so that doesn't bother me uh one of the other uses for capital

they they did have to your to your point ryan was was morgan's little uh small ticket lease business hobby he was doing inside windmark uh that's gone so yeah i mean absent paying down debt and the only reason they take on debt is to buy back shares or pay a special dividend uh absent running the debt down which again they've done multiple times in the past and are very easy for them to do really the only thing they could do is pay dividends or or buy back shares and as mentioned since i own my shares personally in a taxable account i kind of like the buybacks right now to be honest with you because that way i'm not paying taxes on it but you know that's that's that's a nice problem to have. Right. I mean, you know, no tag days for me,

I suppose. Okay. Let's talk any risks. The first thing that came to mind and I'm not well-versed in this company, but I kind of thought, is there any online threat here? Is that the thing that's maybe going to defeat them? I know you probably have a strong rebuttal to that, but I know investors minds and I think, Oh, what if there's something like threat up,

which we looked at that business and that is a strange business model to put lightly but that's besides the point for this question what could go wrong here or the risk to this is goodwill their biggest competitor yeah stuff like that i think goodwill might be aiming a little lower than these guys are um but yeah um my fear of an online threat is not high first off uh um etsy bought uh i don't remember the name of the music group that no no not deep reverb or something yeah it was reverb yeah uh you know that music side for music i mean that i can see that being a bit of a competitor to to music go around although again like i said i think they've got 37 musical rounds it's not a growth engine um that's really once

upon a child play those closet and um uh played against sports are there are there they're in demand concepts and you know a lot of a lot of what people want in this space if you're willing to go consignment uh what you want you want to be able to go touch the product you want to see the product like i i've i have been a uh shall we say frequent customer of uh back in the day at once upon a child i have two kids and now both teenagers so that's you know um we don't go there anymore but uh i just spent one or two dollars there in the past and then the other thing is is played against sports as they turn into teenagers and you know you know get into hockey get into skiing get into swimming get in gymnastics yeah you you go buy what played against sports

because it's a it's a uh it's an attractive uh value proposition versus like i i can't imagine buying um i can't imagine buying you know certain ski gear online sight unseen uh not touching it not trying it on not how like i that might show my age and uh relative lack of tech savvy and that's fine um but i i look at this and go like this is not home depot where you know no one is about to go buy um you know a couple houses worth of drywall from amazon rather than going to home depot you know like you know i don't care about free shipping from amazon i i need 500 square feet of drywall i'm not ordering online i'm buying it you know from home depot i you know these guys don't have that level of uh anti-online moat but i think they got a pretty good one and so i'm not

worried about that. Truthfully, my biggest risks here are kind of twofold. One is they stop kind of being, because Morgan's now been gone from the top job CEO for five years, maybe more actually. He was chairman for a few more years after that, but he was clearly transitioning out. And look, the man I believe is 80 now, or he's close to it. He's allowed to retire. Right? Like, that's cool. But, you know, it wouldn't be the first company where when the tone setter leaves, the people left behind kind of change how things are going. So far, that has not been the story at Winmark. Brett Hepps really came up under John Morgan and seems to have, you know, preserving that culture seems to have been paramount on their list. But it doesn't mean it can't change going forward. So that's something to watch. And the other thing, like I mentioned, is their most recent – I think it's their most recent – a recent board addition is a private equity guy.

And that bothers me. Is there anyone else that's important to this? I saw some names on the proxy that owned a lot of stock. I think Olson was one. And then you mentioned the private equity group. yeah olson uh olson's an outside shareholder uh also from minnesota i suspect it might be just uh much like with nelnet where their entire board is stocked with nelnet of course is based in lincoln nebraska uh their entire board is stocked with local you know business luminaries from

lincoln nebraska i i suspect that uh uh that olson is kind of there because he is uh i think CEO of Sportsman's Guide, which is basically an outdoors catalog company. But I think he probably owns it because it's a local business. He owns about 12%. Morgan is pretty much out at this point. I'm looking at a completely different area on CapIQ here. We'll flip it over. Sorry, these things are kind of uh um occasionally not uh not well scripted um i'm just trying to get the board of directors up for um for windmark here uh just looking here the gentleman who just came on is um percy tomlinson uh he is the operating partner at blue wolf capital partners um and so they do tend to uh talk about um this this blue wolf capital partners they they do seem to be more

debt focused or workouts or turnarounds which is not win mark um so maybe he's just there but it it does concern me a little bit that um that that guy got added to the board because um not a minnesota guy um not a uh not a local business type just you know he he might be there just as a you know as a sop to maybe they got overtures from from this we don't know obviously in the company i'll never tell us uh but you know the um some of the other companies i i when i've introduced them when i've made recommendations on them at hidden gems canada um i i've kind of said you know look these um you want to be aware of of where some of these people are coming from and you want to keep an eye on valuations like retail concepts or whatever because you know like

uh again i i'm not looking for super high growth because super high growth often comes with a super high valuation uh but like a name like contour brands for example contour brands is the parent company that does Lee and Wrangler jeans. That company does about $300 million ballpark a year free cash flow, very slow growing, but it's kind of a $300 million a year perpetuity. And so anytime the valuation of that company dips kind of below, well, take $300 million, divide by 0.10 as a discount rate, a perpetuity valuation, or 0.9, whatever your discount rate assumption is. If the valuation of that company dips below the perpetuity valuation, I'm kind of like yeah you've just put up a red light for private equity to kind of come chase you uh

because you know you maybe investors don't appreciate like retail investors might not appreciate uh you know a slow growing you know firm with perpetuity like cash flows but you know who really does appreciate those things is is the private equity set because they understand that oh well we can just buy that and you know cut off the dividend take all the money for ourselves lever at three to one and you know tea and metals all around at that point um so you know i my biggest fear for windmark is that this blue wolf capital is kind of kind of the first foray into maybe it going away i hope i'm wrong brett heffs if you're listening i hope you're wrong or i'm wrong it's not like i know it sounds like a good problem to have where like oh they get bought out

and maybe you have to pay taxes on some money you make. But I've kind of grown to appreciate this now. We had a company that we thought was going to be a durable compound and for a long time it got bought out for a tiny premium. You want those things to just make your life easier, just to be an easy owner of something for 10 years. And you have to replace the asset. Yeah.

Yeah. Minus 25%, 30% for your capital gains. You guys are Americans, so whatever your capital gains rate is, 15% or whatever, but a little more complicated up here in the great white north. I've got to replace the capital I had. I lose a nice dividend stream, and I got to go find something else to buy with this. I'm probably not going to like it as much as I like Windmark. so i i like a good buyout look i mean i the uh the but i like the buyouts to be much much larger or um like you know so like uh the activision blizzard versus microsoft oh you know there's probably some money to be made assuming that'll close because uh i think microsoft buying them for mid 90s or something yeah pretty good arbitrage there yeah yeah there's a decent

arbitrage there probably less of a decent arbitrage at twitter but that's a whole other story or something like when Teladoc took Livongo. I mean, Livongo was priced generously and Teladoc paid up for them and I think have come to regret that decision today. But yeah, the win mark, I would be very put out if they went away anytime soon.

Yeah. Any more questions? on one mark i think we covered pretty much all the bases uh for listeners that haven't followed you yet but want to keep up with you what's the best place to do that and then can you maybe it's a good time to plug your uh sure as well yeah you got to throw a plug in uh yeah so i'm i've been with the motley fool for 17 years um i uh currently run uh our small cap investing newsletter called Hidden Gems Canada, which is 50% Canadian picks and 50% American picks. One of the reasons for that is Canada is about 3% of the world's equity markets. And so we say to our members, you need

to go outside of Canada to get truly... There's lots of great companies in Canada, don't get me wrong, but there's lots of great companies in the rest of the world and you shouldn't constrain yourself to like 3% of the world's equity markets, particularly an equity market that does tend to be very resource heavy, which is great now, but it wasn't great for years. Very resource heavy, very financials heavy. So we do like to go into U.S. holdings as well. Like we say, we do about 50%. And we tell people, look, don't worry about the currency conversion because currency is going to do what it's going to do. You have no control. Let's buy great companies and sit around. and so I am the lead advisor

and pretty much do everything guy on that and then I'm one third of the investment team that's overseeing Dividend Investor Canada I occasionally contribute to Stock Advisor Canada or any number of the other back ends that Motley Fool Canada has on offer and that's a lot of fun but so pretty much you can find me

around Fool Canada, fool.ca But Hidden Gems Canada is definitely the place where I hang my hat the most. And, you know, if folks want to reach out to me at some point, I can probably find links for new member pricing as well. Just you can kind of come in, don't pay the full freight. And, you know, you can at least decide if I'm and The Motley Fool, if my stock picking style matches what you're looking for. Uh, so you can hit me at, uh, jgillies at fool.com. Uh, the other thing is, um, uh, you know, we, uh, we also hang out if you're, if you're a member to any Motley Fool service, you have access to, um, uh, to fool live. And I'm on there a couple of times a week, usually in the morning show, uh, flapping my gums. And then the third thing is you can find me on Twitter, which is at Jim P Gillies. so and it's got you know uh this is the boba fett picture that's up there yeah right now i think it's some uh i think i yeah you might get more star wars than you're expecting more star wars

and less investing content on twitter or i'm just you know uh i i've been prone to ranting about canadian housing markets of late so you might get you know to twitter is what twitter is and that's In no way affiliated with The Motley Fool. That's just me riffing. All right. Well, I think that's going to do it. Thank you all for listening. And we want to remind you that Brett and I are not financial advisors.

Anything we say or discuss here on Chitchat Money is not formal advice or recommendation. We are general partners at Arch Capital, though, so clients may have positions in the securities discussed in this podcast. Thanks, Jim, again for coming on. And thank you all for listening. We'll see you next time. Thank you.