Motley Fool Hidden Gems Investing - The Business of Resale

Episode Date: July 9, 2023

You might not have heard of Winmark, but you could be more familiar with its stores. The resale franchise company owns concepts including Plato’s Closet, Play It Again Sports, and Once Upon a Child. Winmark CEO, Brett Heffes, caught up with Jim Gillies for a rare interview about: - How a focused mission shapes Winmark’s business - Creating long-lasting relationships with franchisees - The resale company’s capital allocation strategy and growth expectations - What some investors misunderstand about Winmark Company discussed: WINA Host: Jim Gillies Guest: Brett Heffes Producer: Ricky Mulvey Engineers: Rick Engdahl, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. We have something that most companies crave and it's clarity of purpose. You know, we're like I mentioned earlier, we're Windmark, the resale company, and our mission is to provide resale for everyone. So when you have a mission that is pure and it's communicated often, right, it takes the emphasis off of one person and it focuses it on the company and the opportunity. I'm Mary Long, and that's Brett Heffes, CEO and chairman of Winmark, a company that's in the business of secondhand stuff. It's the franchisor of resale brands, including Plato's Closet, Once Upon a Child, and Play It Again Sports. Heffes joined Motley Fool Canada's Jim Gillies for a rare interview about how Winmark stands out in the business of resale, its focus on

sustainability, setting up a company that's not dependent on Heffes' leadership, and a look at Mark's franchising process. First off, I want to commend you for your most recent quarterly earnings press release, the Q1 2023. Fools, I'm going to read the entirety of the press release here just because it tickles me. The sum total of commentary was, and I quote, 2023 is off to a good start, end quote, commented Brett Heffes, Chairman and and chief executive officer, it's not possible for me to tell you how much I love the brevity of that type of press release. Because, you know, a lot of press releases from a lot of companies are longer. And I like that you kind of seem to prefer letting your results do the talking.

In that press release, you give, and you've done this for a while, you talk about the number of franchises you have in operation, so the most recent one you had 1,297 operating, 70 awarded but not yet open, and quote, over 2,800 available territories. And I believe you just started mentioning the territory number about midway through 2021, if my notes are correct. What does an ideal franchisee look like to you as you're slowly growing your franchisee base? What does What does the ideal person look like or group look like to you? Yeah, I wish there was a test that we can, you know, give our high performing franchisees and replicate that, that that that has not been fruitful to try and do that. But there really isn't a ideal candidate.

it. But in terms of background, what we found, however, is what we try to do in our screening process is we try to screen people that are both operationally qualified and financially qualified. So you have to have a certain net worth to be involved because it takes some capital to get started. Banks support you, but we want you to have a very conservative balance sheet coming into the relationship because things can happen. Sometimes growth happens and you need more capital than you thought. And it's a good thing, not a bad thing. Other times, performance isn't what you wanted. You need a little more capital to get going. So first off, we want you financially qualified. Then it's operationally qualified. So the candidates, they learn more about us.

They talk to franchisees. They come in for what we call a discovery day. And then it's really a two-way interview. And it's very shocking to people sometimes because we don't always say yes. We're interviewing them and they're interviewing us. So we're selling and buying at the same time, which is an interesting dynamic. But what we're trying to determine is, will you follow the operating model? Because there's a lot of people that are too entrepreneurial. We want someone who's entrepreneurial, but wants to work within a framework of an established system. And we have a operating model that we believe works very well, has been in place for over 30 years. And we want you to come in and run the model. Run the model for a couple of years, be a successful store,

then we love to hear your input you know then then that's how we all get better together but people come from all walks of life retail professionals teachers we've had a lot of success with with engineers because a lot of this is sort of process and flow driven in terms of the buy counter and how things are organized so there really isn't one thing that we can screen for but if you have an underlying passion for sports for sustainable consumption for being a part of the local community, those are all factors that lead to being very, very successful. In the most recent press release where you talk about 70 awarded franchises, but not yet open, I believe the quarter before is at 57. How fast should we expect that? Because I see the number

is actually opening at about two or three a quarter. It looks like you've been adding in this last couple of quarters. Is that a number that you'd like to move marginally higher? I mean, And I would get scared if you said, no, Jim, we're going 25%. I would get frightened. But is that? Yeah. What is a reasonable growth expectation for investors so we understand? Yeah.

I mean, if you look back at our history, and when I started at the company, we had about 800 stores. And right now, we have about 1,300 stores. So that's a 62% growth rate over almost 21 years, which isn't all that impressive on a gross basis over that period of time. It's a little over 2% store count growth rate, 2.3%, somewhere in that neighborhood. But our system-wide sales have gone up almost 400% to a little over $1.5 billion. it. So what's worked for us is focusing on the stores that we have. You know, the one you brought to the dance is a heck of a lot more important than the other one that you're seeing dancing on the dance floor. So we just focus on that. And so our current store owners during that time

have gotten dramatically better. And that sort of growth rate in network sales is somewhere around 7%. So if 2.3% store count, about 7% sales growth, well, that difference means our stores are getting better every year. And maybe if it's 5% or 4%, whatever the number is, that might not seem all that impressive, but over 21 years, it's enormous. So that's really what we try to do. Because if I get on stage at our franchisee conference, we just had one in Nashville for our apparel conference and they're getting quite big now. We had 1300 people there. If I got on stage and talked about how many stores we're going to add, no one in the audience cares. They care about their own location, how they're doing,

are they making money? And my primary responsibility is to them. There are partners and we want them to be profitable. Now, we also want to grow and we have great concepts. And If we could find more qualified people that fit our criteria, we'd add a heck of a lot more, but it's definitely going to be more than one or two a quarter, Jim. That number that you saw, the reference in that backlog that sort of increased, we signed more agreements in 2022 than we have in any year since 2016, and I'm sure we're going to get into it, but we've repositioned the company, we're refocused the marketing in terms of what we're about, redefined our mission. We're starting to have a lot of success. I think

that's been really beneficial. We want to add as many as we can. It's not going to be 25%, but we can add a lot more than one or two a quarter. I think just stay tuned. That's why we give you that backlog number because we want people to have a sense for what's coming without making a lot of predictions because it's just not how we run the business in terms of investor relations we really don't talk about the future all that much but yeah we're really pleased with where we are despite the eight words in the press release you know i mean that's uh it's pretty verbose for me again that's brilliant so brett let's talk a little bit about sustainability because we've the concept has been mentioned a number of times uh full disclosure i am a former

environmental engineer uh so uh sustainability and uh i'll call it green thinking is uh something that i have been uh passionate about for well passionate enough to get a couple degrees in the subject i'll put it that way um so what what does sustainability for a franchising company like yourself what does that mean for uh for you guys sure i mean what that means is that we've started organizing what all of our individual locations are doing to support some of our um concepts and to support our franchisees and kind of give them the tools to make sure that we are promoting how much good we're doing in the world. And we never really packaged it that way before. No one really thinks about it, but we've been doing this for over 30 years. There's a lot

of relatively new entrants to this marketplace, to the resale industry broadly defined. And we've been a leader in the circular economy for 35 years. We just never really talked about it. So we started getting organized in concert with some of the changes I mentioned earlier. And it's just quite impressive what we've done. I mean, we've extended the lives of almost 1.6 billion items since 2010. And if you were a circularity specialist or someone involved with ESG, you would understand how, how impactful that number is and how massive it is. And that like last year alone, we, we extended the life of 169 million items and that's, I mean, that's 457,000 items a day and five items per second we're keeping in use. And those

benefits to the environment are, are just substantial. So, you know, that's what it means to us. And it, and there's really another layer to it also, Jim, because our focus as a company is on value oriented items. There's a lot of energy and attention around luxury, but ours, we are focused on value. If you are two largest brands or Plato's closet and once upon a child, our price points, our average retail price for Plato's closets, right around $10. It's right around $5 for once upon a child. I don't believe there's really a lot of people or very many, if any, at scale, I can sell $5 items, you know, profitably. So, so we have this interesting combination where we're doing great things for the environment, but we're also providing

really strong economic benefit. And I think it's one of the best examples of sort of shared value that I've seen out there. And that's just a framework where, you know, the social value you provide plus the economic value you provide is really coming up with this incredible shared value concept. So that's really what it means to us. But these value items, if you don't have an outlet like ours, they end up in the landfill. And we still continue to believe that although there's other people attacking this marketplace, the biggest competitor to us is just throwing it away and putting it in the landfill. So if we keep adding stores and fulfill our mission to provide resale for everyone, that's just going to be less items going in the landfill every year.

and that's just better for the world. You've brought up the idea of there are others who are in the resale market. I know there's a few folks online who've tried to make it go both in luxury and lower down. But Winmark isn't the only concept for retail stores. I think Buffalo Exchange comes to mind. I think there's some franchise concepts. Close Mentor. Uptown Cheapskate is another one that one of my co-workers threw the name at me. What would you say makes, you know, what's the secret sauce that differentiates Windmark from these other retail concepts? I'm staying away from the real, real online because that's a very different space. But, you know, like, if the high-quality franchisees are beating a path to someone's door, why should they choose a Winmark banner?

Yeah, I mean, it's interesting, Jim. We really don't get a lot of direct people coming in looking at multiple people and shopping, you know, our concept versus someone else. So we're not exactly sure how that happens in terms of how they choose someone else versus choosing us. But we're the market leader in terms of store count, in terms of four of the five categories we're in, and we're the highest average unit volume in all five. So there's a lot of other companies out there, and this is a very big market, and there's competition. There's been competition since we started. When I started, it was about eBay and even Walmart selling, you know, four dollar T-shirts and that's going to hurt us.

And then it was eBay is going to put you out of business. And then it was the online people are going to put us out of business. It honestly doesn't matter. We have a model that if our stores run the model, they're going to be just fine. You know, the biggest other than the landfill is the competitor. The two things that people don't talk about, which which is is interesting to those of us in the industry, is the donation market is massive. If you think about giving your, particularly in the States, I don't know as much in Canada, Jim, but, you know, bringing your items to Goodwill, bringing your items to Salvation Army, that's a very, very big market. It's a very good outlet for, you know, for a product that you're not using. And in that model, we're sort of complementary, if you think about it. And we've had a lot of stores very successful next to a Goodwill, next to a Salvation Army or a Savers, because we want to be the first stop.

You know, if we're the first stop, you come to us, we buy your items, we'll pay you cash. And there are things that we don't accept because we don't think they'll sell well in our stores. Well, then you can make your drop to so that you're not throwing them away. So we've had a lot of success there. and uh the the other sort of concept that people don't talk about uh but i think they should is the uh independent thrift stores there's an independent thrift store in every town everywhere there's a heck of a lot more of them than there are any probably the other locations put together they're not organized they're not as well capitalized there's some strong independent

operators but there's a lot of weak ones so it's such a big market and it's growing so fast and even some of the online people that you mentioned they're spending so much money educating millions and millions of people about resale and then all of a sudden the the consumer's eyes are open to resale and guess what they're going to do they're going to walk in they're going to notice our stores and they're going to come in and we just think we have the most you know convenient sustainable option you don't have to ship things all over the world you know you don't have to worry about returns you don't need a warehouse with the robots moving everything around everyone is trying to do really good for the environment and i'm really proud to be a part

of this industry because everyone's trying to push it forward but i just really like how we're positioned we're the only pure play resale company at scale that's actually paying you for your you know, for your clothes, or your sporting goods. And I think that positions us really well to do other things going forward. But we just have to focus on each individual owner and making sure that they're following the model. And I'm not terribly concerned about, you know, how the competition is behaving, because it's a very big growing market, there's plenty of room for a lot of participants. Couple more questions here. Things that investors get wrong about Winmark? Do you have anything that's, I mean, obviously, as you said

earlier, there's not a lot of coverage for you guys out there. You don't particularly care. I don't think how much coverage there is. You're just focused on the business, which we like. It's a very foolish concept. But, you know, are there things out there that you believe that the broader investment community has mistaken about Winmark or is it more just a variation of the uh you're still largely under the radar of a lot of shops yeah listen we we don't want formal research coverage i think it doesn't make sense for us and we have 20 shareholders that own about 71 ish percent of the company so if people want to get a hold of us they call and tony or i will return the phone call. So it's pretty easy to get ahold of us in terms of we understand

the needs of our shareholders and there's good, good lines of communication. So we're not, we're not looking for coverage. I mean, we really, we're very focused on running the company. We think that's going to deliver the best outcome for any shareholder. And I don't have any issues with how other companies do it. It's just, this is the way it was. It's always been for us and it's worked and we haven't, we haven't changed that. But in the only thing I would say in terms of what shareholders, it's not that they get wrong. It's, I just don't think they understand how we've set up the company in terms of managing it. And like we, and I don't mean to be arrogant. I want to be really clear, Jim, but it's just something that I've acknowledged after, you know,

being a professional for 30 years or so, it's like, we have something that most companies crave and, and it's clarity of purpose. You know, we we're, like I mentioned earlier, we're Windmark, the resale company, and our mission is to provide resale for everyone. So when you have a mission that is pure and it's communicated often, right. It takes the emphasis off of one person And it focuses it on the company and the opportunity. And I really feel that the work that we've done over the past couple of years, it's changed the entire trajectory of the company. It's changed for the positive. It's changed the culture, changed the performance, it's changed accountability. And we got this new store activity that's been increasing a little bit, and it's really helped with the marketing. So I know that, yeah, I had an impact on redefining the mission. I mean, but, you know, that's my job. It's not some kind of unique skill that only I'm capable of. And I think one of our shareholders, you know, had this quote that I love. And the quote was, I am wary of companies where the CEO makes themselves part of the show. And I think, you know, the person who did the quote, because it's you, right?

I mean, and I really know who said that. Yes. I don't know if that was yours or you stole it from someone. But I love the quote, Jim, because I think sometimes people in my position, they just can't help themselves. You know, they have to be the lead in the story. and and hopefully in your prep work you reviewed our materials you reviewed our taglines and you see that what's front and center for our company is the mission and i would say frankly for a company our size which is very small from a headquarters perspective we have incredible

executive depth i mean you know you you you can call and have the same conversation you just had with me these last 25 minutes with tony isog our chief financial officer he's been with us for 15 years. Extremely talented executive. You know, Renee Gaudet, our chief operating officer, she has one of the best stories in specialty retail that no one's ever heard about. She started with us as a store manager in a once upon a child location. She's now our chief operating officer. I have, you know, three, four other people on sort of our weekly management calls that are just unbelievably talented. And there's just too many to name, but we have an unbelievably talented group of employees. We have an average tenure just shy of 10 years, which is pretty rare.

So when you have strong employees, executive depth, and a clear mission, that reduces the risk for the shareholders. It reduces the risk for the franchisees. And we train on this. So we have a document, a training document. We call it We Are Winmark. So when someone comes in, we train you on, you know, this is how we communicate to franchisees. This is how we treat each other. This isn't an individual pursuit. You know, this is a shared pursuit. You know, we try to promote from within for every position, if at all possible. There's just a lot of ways that we foster kind of who's your replacement and continuity because our renewal rate is so high. It's 99% over the last 10 years with our franchisees.

there's a very good chance that people signing up with us today are going to be with us 20, 30 years. And we have plenty of examples of that, plenty of examples. So the people that are coming into the system today, they're going to be in the system after my career at the company is over. So in my role, I have a responsibility to help organize the company in a way that is not relying on me. And I think everyone on our team has sort of bought into that now. And I think that's what again, going back to your question, not what people get wrong, but they don't appreciate about us because we're not out there that much talking about it. But I'm very confident in that we're going to continue to provide really strong franchisee support, you know, whether I'm in

this chair or whether someone else is in this chair. And that's, that's very gratifying because ultimately that's what I want. I want something that is built to last and something that's permanent. And I feel like that's the path we're on. And it's really rewarding, but very exciting as well. We are an investment, an investing company. We are obviously focused on investing and investing outcomes. So, I would be remiss if I didn't ask at least one investing question. But again, as someone who has held personally your shares for about a decade and a half, I don't think I'm in your 20 investors who own 71% of your shares, though. You've been a very interesting dividend story since declaring your first dividend back in 2010,

I believe. I think it was $0.02 a quarter. I believe you're now up to $0.80 a quarter. What's a 20-fold or 40-fold increase over a decade between friends, I suppose? But you've also done buybacks. How do you ascertain, because you are profitable, you are very cash generative. That's something that I admire about franchise businesses in general, and certainly Windmark in particular. How do you, as an executive team, think about, do you prefer dividends, dividend increases, buybacks, as part of the way that you return capital to shareholders? Sure. I mean, I'm sure you're not going to be surprised by this, but we have a philosophy that we've shared with ourselves internally, we've shared with our board, and we've shared with shareholders in terms of how we think about capital allocation. So it's not a mystery. It's a pretty boring document, but the document, it's about five or six bullet points. We have a capital allocation philosophy and the first tenet in the capital allocation philosophy is we're going to focus on running the company because if we don't run a good company, there's no capital to allocate. And I think when I listen to some executives talk or some shareholders talk at times, I do chuckle because there doesn't seem to be that really basic premise. So you have to run good operations in order to have capital to allocate. But we kind of go through a waterfall of things that we'll look at.

um the other key tenant of the of the capital allocation strategy is we don't want to sit on excess cash because we think that's value destroying so and now that we've restructured and refocused the company the only business we have is this core business and it we don't have any capital expenditures or any needs for capital so we are generating capital in excess of the requirements of the business every every week frankly every week so uh what we what we do with that is we just look for value creating opportunities last year we found one we converted 11 played against sports stores that weren't franchisees to franchisees as a result of some old legacy agreement that was a very high return transaction but it was small and there aren't a

lot of opportunities like that so when it what it boils down to as you highlighted is we really do have three primary uses. We can pay down some debt. We like having modest amounts of leverage if the rates are proper, because we think that makes sense given the 99% renewal rate and the predictability of the business leads to the ability to have some modest levels of debt. We don't want to get too crazy on that. But the primary avenues are dividends or buybacks. And we like the quarterly dividend, but we don't want it to get too high so that our flexibility is hurt. We got to a point where we're pretty comfortable, you know, in terms of kind of what we're paying on an annual basis with that vehicle. And then when it frankly comes down to it, it's where do we see the value in the company relative to what the public markets are providing us on a daily basis?

And if there's a mismatch there, we're buyers. And I think as you've probably seen and maybe even done the calculations, we've repurchased a lot of shares over the years. Last couple of years alone, we've purchased almost $100 million of stock in the last 30 months. And as it turns out, in the short term, that's been very productive to our shareholders. But ultimately, that's probably better long term to be buying back the stock than the special dividends.

But given what I said earlier about not wanting to hold on to excess cash, if we have excess cash, we don't have any problems giving it back. And that's why we've been doing some of the special dividends as well. So think over our history, we've maybe done five special dividends. So no one ever complains when that happens. People are pretty excited when that happens. So I think on preference, that's a long answer, but on preference, we think it's best for everyone if we buy the shares back as long as it's at a reasonable price.

Absent that, we're going to give the money back. And we just have to decide how much cash we want to keep on hand. You know, before the pandemic, we had a million dollars of cash on hand. Well, you know, obviously, that was a bad strategy during the pandemic. which we worked out of and going forward it'll it'll be more than a million dollars obviously but we just don't know exactly what that number is yet and i just think we're going to keep keep doing our thing jim it's like we don't spend a lot i've just spent four minutes probably talking about capital allocation that's probably more than i'll spend the entire quarter we we just

kind of have a formula we kind of go through it we know what we're we really have a strong view on what we're worth. So we know if we want to be buying the stock or not. It's not a big complicated exercise that we go through, but everyone's on board with how we do it. We communicate very frequently with all the constituents involved in making those decisions and we just kind of do it. It's more of a process thing as opposed to some big business school case study. And that's just how we've done it. It's worked well for our shareholders. It's worked really well for our shareholders. We have some happy, Jim, you're probably one of our happiest shareholders, but we were fortunate that we have some really high quality long-term owners. And

that's also very rewarding in my position because having people supportive, you know, eventually there'll be a bump, there'll be a hiccup. And when you've been through some really good times with people, I think it really helps, you know, smooth out when times aren't perfect. Because it hasn't been a straight line the past 21 years either. You know, there's been some bumps along the way. Sure. And that's perfectly fine. Every company goes through it. But no, I think that's a great answer, Brett. And I think we're up on our time. So I think it's a great place to stop. I really appreciate you joining us today and hopefully introducing some fools to uh, you know, one of, uh, uh, you know, a company that I think a great deal of, I've recommended it

in, uh, four or five places around the fool, I think. Um, and certainly, uh, uh, multiple Canadian services, ironically enough, but, uh, you know, but you know, Minnesota, you know, you're probably a little North of me anyway. So it's, yeah, for sure. And if you don't mind, if I can just say, can I just say one thing? Sure. I'd be remiss if I wasn't on, you know, a, a podcast like this and just and didn't say this like i hopefully everyone understands how much i care about this industry how much i care about our franchisees what a good business i think we have together but we have 2800 open territories uh in markets all across north america and if you're interested go to www.windmarkfranchises.com learn about our concepts fill out an application

And we'd love to talk to you about, you know, bringing our concept to your community because it's really special and we think we can do really wonderful things together. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow. Thank you.