Motley Fool Hidden Gems Investing - Why Resale is Forever

Episode Date: April 27, 2024

Winmark doesn’t make a lot of noise. The business speaks for itself. Winmark, a resale is a franchisor that owns concepts including Plato’s Closet, Play It Again Sports, and Once Upon a Child. The company has tripled the return of the S&P 500 since its IPO, and delivered an annualized return of 18% over the past five years. So, investors may want to pay attention to it. Motley Fool Canada’s Jim Gillies caught up with Winmark CEO, Brett Heffes for a conversation about: - The growth of Play It Again Sports and a slowdown at Music Go Round. - How Heffes thinks about capital allocation. - Building an everlasting business. Company discussed: WINA Host: Jim Gillies Guest: Brett Heffes Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

You've got to try breakfast at A&W. You've got to try breakfast at A&W. And what better way than with the delicious Pret Organic Coffee. Starting with just one dollar, all day, every day, now until December 31st. You've got to try breakfast at A&W. At participating A&W locations in Ontario. Winmark and our franchisees, we are on the verge of something like truly meaningful together. And we want to formalize this, like not in a legal document, but in a pact.

Because what happens, Jim, is our most successful franchisees, they understand that their business is a legacy asset in the community. They manage the business for themselves, the community, but more importantly, the next generation. i'm mary long and that's brett heathers ceo of winmark a franchisor of resale concepts including plato's closet play it against sports and once upon a child this quiet company in minneapolis minnesota doesn't do earnings calls but it's smashed the market since its ipo and over the last five years winmark's efficiency can be found in this stat it's made more revenue per employee over the past year than Salesforce, Procter & Gamble, or Tesla. So that's why stock

investors may want to pay attention to it. Motley Fool Canada's Jim Gillies caught up with Hefez for a conversation about how Winmark is building an everlasting company. So I kind of wanted to talk a little bit about, you've just reported first quarter earnings uh this week uh you've raised the dividend again which has kind of become an annual uh thing for you i believe it's now up to 90 cents a quarter um i i would like if you will indulge me i'd like to read for for listeners um the entirety of your commentary in in this press release announcing q1 earnings uh performance during the first quarter was adequate commented brett d heff as chair and chief executive officer um what's the phrase damning with faint

praise uh you know that's um that tickles me and it i think the last time we spoke uh for for motley fool money uh again the brevity tickles me um please don't stop doing that but uh what made you call Q1 adequate? Yeah, you know, it's hard sometimes to encapsulate what we want to get across, because we really don't want to be promotional and try to have anyone read into what we're saying. And, you know, honestly, my definition of adequate means it was acceptable. We had good things happen in the quarter. We had things that weren't as good happened in the quarter um and we just felt like it was a good word to summarize what happened it was it was acceptable it wasn't impressive it wasn't extraordinary but it wasn't bad either

you know there were there were a lot of great things going on as well so we just felt like it was a good way to summarize and then let people do the work of digging in and seeing you know seeing what what the numbers show you know it was uh free cash flow which is the metric that i follow uh for you guys was about things looked pretty flat so uh that is not necessarily good nor bad so i suppose as you say adequate probably um probably adequately describes that no pun intended um but a couple of things i did note from the 10q before i do want to talk really about strategy at windmark i want to talk about where you go from here uh because you have had just a tremendous this you know kind of two decade run uh you know frankly um one thing that i did notice as i scanned

through your 10q um you know so obviously the the straws stirring the drink or plato's closet once upon a child and played against sports with at least 290 plus outlets of those three concepts style encore and music go around and i even noticed that you you you called a couple of music go around uh stores in the quarter was there a reason for that like like because i've always thought that the music uh the music entity is very very profitable if you're a musician obviously and you want i mean i know a few guitar players and they they never have enough guitars it's kind of funny um but like is there something i should look there or like just for these smaller concepts i'm also very excited about style encore but yeah i mean it's been harder to grow

than we anticipated if you look at our top quartile it's really solid you can go to one of our top quartile stores, Jim, and I'll pick like Stewart, Florida. I mean, the place is amazing. They just moved their location. I personally haven't been to the new store, but I've been at the old store and it was like poetry in motion. Happy customers, carloads of women coming in to buy and sell their gently used items, a lot of apparel sales, shoes, purses. It's a really special concept for us and a lot of great locations across the system. And overall, all, it's meeting the financial model that we anticipated. AUVs are, they're actually higher in year 10 for Style Encore than they were in both Plato's Closet and Once Upon a Child. So

on paper, it's working and it's working for Winmark. It's working for the franchisees. It's working for Winmark as an investment. We invested about a million through the P&L and last year royalties and franchise fees were about 3.1 million. So pretty strong return. But we're not meeting our store count goals. So, I mean, I think it's really valid to talk about it. And we're not close to fully capturing the opportunity. We have a pipeline for 2024, so we do expect some openings this year. We're really excited about that.

But store growth's been elusive there. And in my opinion, there's really a couple of factors contributing to this. Style Encore was the only brand that we started from scratch. I don't know if everyone understands the history here, but that was the only one we started from scratch, and there was a larger and more established direct competitor. We probably underestimated the impact that would have a little bit, but the biggest issue when I sort of do a deep dive in terms of a critical analysis of what went wrong, I think we had some self-inflicted issues. issues. We made some mistakes and, you know, we're moving away from those, but we have to come clean. And, you know, we tested awarding multiple agreements at inception and it was a disaster. You know, we got away from, we did. I mean, we got away from what has made us successful

and that's been awarding stores one at a time. Some of that, I think, relates to the fact that there was a larger player out in the market already and we felt like we had to catch up faster. And the other piece is there was too much of a focus on higher end handbags and no men's. You know, we when when we had our discovery days early on, we pitched style encore as a designed by women for women. It's very catchy, you know, from a marketing standpoint, but it got us away from our core value message and our ability to serve a broader audience. And that's those have been really key components for success at Plato's Closet. many people don't realize this, but men's is over 20% of sales at Plato's Closet. It's a key component to both traffic and profitability. So I feel like, listen,

we've proven that the style, that the style on car concept, it works financially. Men's has a potential to be an accelerant. And we think our goal is to grow store count, you know? And I know your listeners are active on social media, but look, go to the Dixon City, Pennsylvania-style Encore Instagram feed. They did a men's golf event last month, and you'd be shocked looking at their post versus where we were 9, 10 years ago. And this is a good example of where we can evolve to. So today, about a third of the system is buying and selling men's product, and eventually it'll be everybody. But I mean, we need, you know, not men need resale option to Jim. I'm going to admit, I wasn't expecting you to throw me to an Instagram feed.

I have to admit, I'm on Instagram for one reason to follow my kids. I don't know how to use it. And I'm going to touch on music around too, but our long-term goal as a company, I want to have five growth brands. Okay. Okay. We don't. My definition of that is adding 10 stores a year. So at this time, only three of the five concepts meet that definition. That's an improvement from four years ago. We used to only have two because Play It Again Sports has really come up. I don't have a timetable. I'm not sure if it's going to happen, but we're coming in every day and getting after it because there's no financial reason. if you look at the financial profile of the stores in all the brands, including Music Around, why they all can't be.

So we're not going to yield on the opportunity, but we're just not there yet on the other two. And I would just say stay tuned. You've stated that, again, forgive me for maybe putting this in a crass different way, but Play It Again, you talk about how Play It Again is really kind of growing on this day after a few years of, you know, not really going. What have you gotten right there to kind of kickstart the growth at Play It Again?

Yeah, I mean, I am really excited about Play It Again Sports, Jim. I could talk for a long time about what's been going on there and what we've done. It's been really fun to watch it because it wasn't performing. We had about 17 years of declining store count, and we've turned that around. So I think we've gotten right a lot of things. And the bottom line is we started out with very strong performance during the pandemic. So if you look at the sales performance in our 10Ks over the last four years, you'll line it up. You'll see we had over 40% growth in sales over that period. So you're looking at high single digits growth, and that includes, you know, a period of time where we had a couple of months of, you know, closed operations because of the pandemic. So very strong performance during the pandemic. It was driven by fitness and individual sports because that's the only thing people could do at that time.

And then when we emerged from it, team sports people were over the top in terms of team sports. And some of the individual sports, fitness in particular, sort of backed up, but team sports stepped up and replaced it. So, that's just sort of the underlying performance. But then we look at what our franchisees did and then what we did. One of the things that quietly happened, it's not quiet to us because we don't tout it that much, is we've implemented a multi-channel marketing into the business model. So, and some of our franchisees are having a lot of success with that as a sales vehicle, but most importantly, as a marketing vehicle. You know, if you go to PlayItAgainSports.com, you can see 180,000 unique items, used items that are available for sale. And that's very exciting because a lot of times people, they look at it on, you know, they look at their phone at home and then they come into the store and they can see the item. That's not just women that do this. Men do this too.

Parents do this also. So that's been a big positive. And the other thing that I that it's been a game changer for us is we've really increased the level of investment in the brand. And we've introduced two types of sponsorships, both sustainability partnerships and just sort of corporate sponsorships. And I can get into this if you'd like me to. I think it's really important because it's been a driver. but i don't you know i you can go wherever you want to go with this uh well uh as an equity analyst we'd like to hear about drivers so i'm gonna actually take you up on that so these the we introduced five partnerships over the past 24 months uh sustainability partnerships rawlings easton and baseball ccm for hockey elon skis innova disc golf and we recently announced

a new partnership with an STX for lacrosse, the preeminent brand in lacrosse. And so now we have the ability and our stores have the ability to showcase the quality of our brand partners to our mutual customers. And we can demonstrate to just the general consumer that the underlying brand cares about the environment. So we can turn any consumer products company that's making something that's a consumable and turn it into a sustainability story so we're showcasing these brands as sustainable and then we're reinforcing that your local played against sports is the place to go to get quality used items so these partnerships have provided substantial marketing opportunities for our franchisees i haven't seen this level of local store marketing

for our franchisees in in my 20-year career here at windmark so it's just very very exciting and And it's really driving a lot of awareness, you know, for played against sports. And so that's on the brand side. But then we're investing as well. And we have too many corporate sponsorships to talk about. But I'll talk about a couple. You know, we sponsor a PGA Tour professional, Tom Hoagie. Well, Tom Hoagie, one, he was a customer when he was a kid.

He bought his baseball gear in Fargo, North Dakota. But two, he wins at Pebble Beach. he's holding up his trophy, and it says Winmark on his shirt. PGA Tour does an Instagram post with 3 million followers, and it says Play Against Sports on his shirt. So that awareness, and it's a genuine story, is very important. And then Blake Bolden, who is a brand ambassador of ours, she had a mentorship program that we sponsored. She's just an unbelievable individual, and she's just an inspiration to these young women all across the country, helping them pursue their athletic dreams. So we've spent some money to reinforce our brand, reinforce who we are.

And the interesting thing is as a result of that, we're getting now a lot more organic opportunities that pop up. You think about all the people, famous people that have been customers of our stores. It's really impressive. I mean, I was home one morning, my college roommate sends me a tech. He's like text. He says, listen to the new heights podcast. I don't know. Are you familiar with with i am not but please continue the kelsey brothers uh travis travis kelsey kelsey football players uh kansas city chiefs they're talking on their podcast about you know buying their street hockey gear from played against sports when they were a kid in cleveland a few weeks later jj watt nfl player 5.6 million followers on instagram he and his brother are talking about

playing hockey in wisconsin played against sports when wayne gretzky wanted to sell some of his hockey you know equipment he called play it against i don't know if he called or someone on his team called but talk about inspir how inspiring is it to our whole company that the great ones a customer of ours so we're just finding that like success begets success and what's been going on with the played against sports for the past four years just gives us some really good momentum, and then individual store performance improved, store count improves. We had two years in a row of positive store growth.

So I'm really, you know, happy with where we are right now. It's been a big change over the past four or five years, and we're pretty excited pointed forward with all the activity in Play It Against Sports. I want to kind of go in a capital allocation direction, if that's okay. Yeah, I figured. Well, you know, we can't reiterate the last time we had one of these, so we have to kind of go down a little bit of different roads occasionally. But so the way I kind of look at your company, and I know you know this, but this is for members and for people maybe just hearing about Windmark today, is you do not have grand opportunities to reinvest in your own business all of the capital you produce.

I hope you think that's a fair statement. um uh you know i i would i would as evidence i would point to your history of not only raising the dividend every year and you've of course just raised it recently again but also the history of special dividends uh your history of buybacks from time to time the stock share buybacks um and so can you can you talk a little bit about your philosophy of capital allocation so you know people don't have to infer from mine like like you you've got some debt uh you know we have some voices on our team that say why they got so much debt um you know you you buy back stock at certain times but not at others can you can you expound on some of those decisions yeah sure i i and and

this can go a lot of different directions uh and we did touch on this the last time but you know we got a couple a couple of key philosophy points the first is we're going to focus our energy on running the company because if we don't run a good company we're not going to have any capital to allocate. And even though that doesn't make sense when you're specifically talking about capital allocation, we just want to keep reinforcing for everyone involved is that this isn't our business. Our business is to run a good resale company. And the result of running a good resale company is cash. So this isn't something I said this last time. I meant it, by the way. I will spend more time speaking with you today on this than I will the entire month. Talking, you know,

executing this because it's not something that takes a lot of time. But I'm happy. I'm happy to do it. I understand how important it is. So that's really key. We're going to focus on running the business. Secondly, we do believe that modest amounts of debt are prudent for our business model. We have relatively long term. We have long term contracts. We have high renewal rates. And within a band, it's relatively predictable in terms of what our royalties will be. So modest amounts of leverage are prudent for us the other thing is we don't want to hold on to excess cash and i don't have any problem saying that out loud we have i have been a shareholder in companies i suspect you have been i suspect your listeners have been shareholders of companies that they've

seen management make bad decisions when they're sitting on excess cash and i think that is has the potential to be a very large value destroyer. That is not, you know, my job is to create value, not to destroy value. So we're also not going to sit on cash. We can talk about how much cash is too much, how much is too little. Before the pandemic, we didn't keep a lot of cash. Now we're keeping more because we live through that. So once we get through all that, we look for value creating ideas. We run our company, but we see things. We're in the flow on ideas. And if I can find something and our team can find something, Rene Gaudet, our COO, Tony Isag, our CFO, all the other talented management members we have, if we find ideas that create a higher return

than buying back our stock, we'll execute them. There just aren't that many out there. We haven't found that many. So our next, our next three things we can do is pay down debt, buy stock or do a dividend. So let me come back to the debt. Cause I think that's a whole, it's a different discussion, but if you look at buybacks, we believe long-term that's, that's the best thing we can do for shareholders is buy back stock at an attractive price. i think the key words there are at that attractive price i like i like that you caveated that oh yeah yeah i mean we just believe that long-term buybacks create more value than dividends right i mean and it's it sounds that's why we do the math jim like i'm chair and then

i'm a fiduciary so i mean not only is it i have a responsibility to execute a business strategy and and execute capital transactions that i believe are in the best interest of all shareholders and overpaying for stock is just something i can't support i've never met a shareholder that disagreed with us on that ever now we may have different assumptions and so those different than you like i might have a different assumption than you about a variety of things it may lead to a different target price but the basic premise i've never had anyone argue so we run these models says pay X dollars per share, we pay X or less. And I can't comprehend why a capable executive managing a bubble company on behalf of shareholders would pay a premium to their own estimate of fair

value. I have some bad news, Brett, about certain companies. Yeah. I wanted to kind of talk a little bit about uh you know some of my notes here is is getting alignment between various parties so shareholders franchise you're dealing with a lot of folks you're dealing with you know internally you're dealing with a lot of franchisees you're dealing with your your own employers how are you walking that tightrope yeah it's uh it's challenging at times and i really think about it as like a venn diagram you know we have we have a lot of people we're responsible to And it's franchisees, shareholders and employees. And and there is a meeting in the middle there that everyone benefits the same. And that's the balance. That's my job. That's that's what we're trying to strike.

And I don't want to say any group is more important than the others. They're all really important. We need all of them. We need we need strong franchise partners. We need shareholders and we we need employees. So I believe that where we are now as a company, I don't know if we're ever going to be fully aligned, but it's asymptotic toward being fully aligned. I mean, if you just look at our core business and how we've set up the franchising business, and again, I didn't set this up. I want to be clear, but it's how the business is set up is we are only successful if our franchisees are successful. there you know our only meaningful form of compensation is a weekly continuing fee that we get based on their percentage of sales right there are franchise fees there's some marketing there's other funds so i you know but they're not they're they're not profit centers for us

the only thing we're not selling napkins we're not selling cheese we're not selling ad space. Any vendor that we work with, we don't get kickbacks from. So it's very clear to the franchisees that we're in it together. The only way we do better is if they do better. Impossible to have a scenario where a franchisee's sales go down and our royalties go up. possible so that is really helpful just in the dialogue and in the relationship so i think that from a franchisee perspective that's really key from a shareholder perspective uh you know the management team here are owners you know and and i don't know what better way to get a line than you know if you look at me and tony and renee uh the last proxy like

I don't know the exact numbers, but I want to say I own 50 times my base salary in stock. Renee owns 15 times and Tony owns maybe 30 times. If we execute really bad ideas, it's going to hurt us a lot more than anybody else. There's maybe one individual that's going to get hurt more than us. So it doesn't mean we're going to be right all the time, but we're all paying attention so i think that ownership and it's not just it's ownership stakes that have been built up over long careers 21 years for me 29 years for renee uh 16 years for 16 years for tony so our skin's in the game we're paying attention i don't know i don't know how to get better alignment than to have all of us you know be be owners and in the manner in which we

are. And then from an employee perspective, listen, I'm really proud of our employees. We have a great balance of tenured employees and newer employees. Our average tenure is around 10 years, which is good. I don't have data on all companies everywhere, but that feels like a very good number to me. And you don't get to stay here because you're old. You know, you get to stay here because you're good. And I'm extremely proud of, you know, all those classes. But the other thing that we implemented in the past few years as a profit sharing plan. So all of our employees, they directly benefit in the performance of the company. It's been a great vehicle to broadly share the benefits of running a profitable and successful company. Like every single person at

the company, they know the goals and we're all moving in the same direction. So our employees understand the culture the purpose and our mission and we're building this to last and and i think we're aligned with all categories you know franchisees shareholders and employees and that's what i'm really it's really important to me that to get that alignment that's fantastic uh i i know we've we've gone a little little long but hopefully they'll indulge us in the studio for at least one more i'd like to ask you about what is new since we did our last interview i think was last july uh what what is new about and and what should we be looking for that's new for the future of winmark winmark the business i should say because i'm a firm believer in if the business

is run in a certain well stock performance comes from business performance so i'm very interested in in our our discussing here the business performance what are you doing that's new because that, you know, run a business well, and it translates to positive returns and the opposite, of course, as well. But when Mark has been a pretty good success story for the past couple decades. So what what do you have new that's going on that that listeners should know about? Yeah, I think one thing I'd really want to share with listeners is like, every single employee at this company is thinking about our mission to provide resale for everyone on a regular basis. And there are three main components of our mission, and we call it the Winmark way,

support, sustainability, and stewardship. From a support perspective, you know, we completed, our employees completed over 3,000 support visits last year to franchisees. We had a 99% renewal rate. We had a record level of system-wide sales and the highest store count in our history. We completed almost 270 transfers from one owner to another owner over the last five years. and our entire team comes in every day focused on helping franchisees improve their operations and grow their business. It's all about that support. From a sustainability standpoint, we've been a leader in the circular economy for 35 years, for over 35 years. If you care about sustainability, we kept 183 million items out of landfills last year alone, and since 2010,

over 1.7 billion items. Those numbers are astounding. So our franchisees have been positively impacting the environment and local community since 1983. But the real thing in terms of what's new is we are going to be rolling out. We're packaging this windmark way to start marketing to franchisees because the name of the game is stewardship. And that's really a very key concept for us that we're going to be talking a lot more about. Our business model is timeless. We don't want you to think about you're just opening up a hot dog stand in a food court somewhere, right? Windmark and our franchisees, we are on the verge of something like truly meaningful together.

And we want to formalize this, like not in a legal document, but in a pact. Because what happens, Jim, is our most successful franchisees, they understand that their business is a legacy asset in the community. They manage the business for themselves, the community, but more importantly, the next generation. And this legacy mindset, it leads to continued investment on our part, whether it's technology, whether it's marketing, whether it's operations, and it just allows us to fulfill our mission. And you think about what a long-term asset in the community means. It's like, think about a hospital, a church, a school.

We want to put our stores in the community forever. So that means as an owner, succession planning is going to be important, and transfer of ownership is critical to the long-term success. So we're going to be rolling this concept out. We think we're going to get a lot of buy-in from the franchisees. We think it's going to help with our closure rates. We think it's going to help with just better engagement with the franchisees. and it's just very rewarding and gratifying to be a part of something that I truly believe that we're going to be around for hundreds of years to come. Like that's what we're going after.

It's something permanent, it's something real, and it's a true legacy business. So that's the probably most exciting thing from an internal windmark franchisee relations that we have going on. I think you're going to see that permeate, not necessarily in our consumer marketing but in terms of how we interact with the franchisees well i will say as we as we move towards wrap up uh molly fool likes to espouse long-term ownership long-term stock i mean they're the cliche of our which we stole from buffett of course is uh you know our favorite holding period is forever it's not possible with some we'll fully admit that but uh so to i don't know that i've ever heard uh someone in your position when i'm talking to them uh talk about multiple

centuries about uh you know legacy but uh you know i certainly like hearing you know that you are thinking about the business for the long term because again long term long-term ownership of quality stocks is i believe the fastest way to build wealth in north america canada being you know its own country um anyway which is where i am but uh no keep in mind keep in mind our stores pay out about $420,000 a year to the community, over $1,100 a day per store. I don't want that going away for the community. Bottom line, it's not about the financial impact, not about the financial impact to Windmark. We can handle one store closing with the $1,327 you mentioned, but I don't want that, you know, that young girl who wants to go get some hockey skates,

not be able to get them you know i don't want the couple that can't get their clothes for their date on saturday night because the playhouse closet closed that i mean i i mean it and i'm serious about it and it's not just ceo speak like these concepts are going to be in the community forever and that and that's success and anything short of that is not acceptable not that's a good way to close. It's not acceptable. I like that. It's not adequate. Thank you. As always, people on the program may have interest 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. Thanks for watching!