Why Resale Is Forever

Resale company Winmark 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.

In this podcast, 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.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on April 27, 2024.

Brett Heffes: Winmark and our franchisees, we are on the verge of something truly meaningful together and we want to formalize this. 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.

Mary Long: I’m Mary Long and that’s Brett Heffes CEO of Winmark, a franchiser of resale concepts, including Plato’s Closet, Play It Again 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 and Gamble, or Tesla. That’s why stock investors may want to pay attention to it. Motley Fool Canada’s Jim Gillies caught up with Heffes for a conversation about how Winmark is building an everlasting company.

Jim Gillies: You’ve just reported first-quarter earnings this week. You’ve raised the dividend again, which is become an annual thing for you. I believe it’s now to $0.90 a quarter. If you will indulge me, I’d like to read for listeners the entirety of your commentary in this press release announcing Q1 earnings. Performance during the first quarter was adequate, commented. Brett D. Heffes as Chair and Chief Executive Officer. What’s the phrase damning with faint praise? [laughs] That tickles me and I think the last time we spoke for Motley Fool Money, again, the brevity tickles me. Please don’t stop doing that. But what made you call Q1 adequate?

Brett Heffes: 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. 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 happen in the quarter, and we just felt like it was a good word to summarize what happened. It was acceptable. It wasn’t impressive, it wasn’t extraordinary, but it wasn’t bad either. There are a lot of great things going on as well. We just felt like it was a good way to summarize and then let people do the work of digging in and seeing what the numbers show.

Jim Gillies: It was free cash flow, which is the metric that I follow for you guys. Things look pretty flat, so that is not necessarily good nor bad. I suppose that as you say, adequate, probably, adequately describes that. No pun intended. But a couple of things I did note from the 10Q before. I do want to talk really about strategy at Winmark. I want to talk about where you go from here because you have had just a tremendous two-decade run, frankly. One thing that I did notice as I scan through your 10Q. Obviously, the straws during the drinker Plato’s Closet, Once Upon A Child and Play it Again Sports with at least 290 plus outlets of those three concepts. Style Encore and Music Go Round, and I even noticed that you called a couple of Music Go Round stores in the quarter. Was there a reason for that? Because I’ve always thought the music entity is very profitable if you’re a musician obviously. I know a few guitar players and they never have enough guitars. It’s funny. But is there something I should look there or just for the smaller concepts?

Brett Heffes: I’m also very excited about Style Encore, but 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 Stuart, Florida. 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 and motion. Happy customers, carloads of women coming in to buy and sell their gently used items. A lot of parallel sales, shoes, purses. It’s a really special concept for us and a lot of great locations across the system. Overall, it’s meeting the financial model that we anticipated. AUVs, they’re actually higher in Year 10 for Style Encore than they were in both Plato’s Closet and Once Upon a Child. On paper, it’s working. 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. Pretty strong return. But we’re not meeting our store count goals. I think it’s really valid to talk about it. 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. In my opinion, there’s a 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 do a deep dive in terms of a critical analysis of what went wrong, I think we had some self-inflicted issues, we made some mistakes and we’re moving away from those, but we have to come clean and we tested awarding multiple agreements at inception and it was a disaster. We did, 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. The other pieces, there was too much of a focus on higher-end handbags and no men’s. When we had our discovery days early on, we pitched Style Encore as designed by women, for women. It’s very catchy from a marketing standpoint, but it got us away from our core value message and our ability to serve a broader audience. 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. I feel like, listen, we’ve proven that the Style Encore concept, it works financially. Men’s has the potential to be an accelerant. We think our goal is to grow store count. 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 nine, 10 years ago and this is a good example of where we can evolve to. Today about a third of the system is buying and selling men’s product. Eventually, it’ll be everybody. Men need a resell option too, Jim. [laughs]

Jim Gillies: I’ve got 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. [laughs]

Brett Heffes: I’m going to touch on Music Gram too but our long-term goal as a company, I want to have five growth brands. We don’t. My definition of that is adding 10 stores a year. 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. 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.

Jim Gillies: Again, forgive me for maybe putting this in a crustful way but you talk about how Play it Again is really growing obviously after a few years of not really going. What have you gotten right there to kick-start the growth at Play it Again?

Brett Heffes: I’m 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. I think we’ve gotten right a lot of things. The bottom line is we started out with very strong performance during the pandemic. 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. You’re looking at high-single digits growth. That includes a period of time where we had a couple of months of closed operations because of the pandemic. 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. Then when we emerged from it, people were over the top in terms of team sports. Some of the individual sports, fitness in particular backed up, but team sports stepped up and replaced it. That’s just the underlying performance but then we look at what our franchisees did and then what we did. One of the things that quietly happened is not quiet to us because we don’t tout it that much is we’ve implemented a multi-channel marketing into the business model. Some of our franchisees are having a lot of success with that as a sales vehicle, but most importantly, as a marketing vehicle. If you go to playitagainsports.com, you can see 180,000 unique used items that are available for sale. That’s very exciting because a lot of times people, they look at their phone at home, and then they come into the store and they can see the item and that’s not just women that do this. men do this too, parents do this also so that’s been a big positive. The other thing, 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 corporate sponsorships. I can get into this if you’d like me to. I think it’s really important because it’s been a driver, but you can go wherever you want to go with this.

Jim Gillies: As an equity analyst, we’d like to hear about drivers. I’m going to actually take you up on that.

Brett Heffes: We introduced five partnerships over the past 24 months, sustainability partnerships, Rawlings Easton and Baseball, CCM for hockey, Elan Skis, Innova Disc Golf, and we recently announced a new partnership with an STX for the preeminent brand and lacrosse. Now, we have the ability and our stores have the ability to showcase the quality of our brand partners to our mutual customers. We can demonstrate to just the general consumer that the underlying brand cares about the environment. We can turn any consumer products company that’s making something that’s a consumable and turn it into a sustainability story. 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. These partnerships have provided substantial marketing opportunities for our franchisees. I haven’t seen this level of local store marketing for our franchisees in my 20 year career here at Winmark. It’s just very exciting and it’s really driving a lot of awareness for Play it Again Sports. 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. We sponsor a PGA Tour professional, Tom Hoge. Tom Hoge, 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 off his trophy and it says, Winmark on his shirt. PGA Tour doesn’t Instagram posts with three million followers, and it says Play it Again Sports on his shirt. That awareness, and it’s a genuine story is very important. 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. 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 famous people that have been customers of our stores, it’s really impressive. I was home one morning, my college roommate sends me a text, he says, listen to the New Heights podcast. Are you familiar with that?

Jim Gillies: I’m not, but please continue.

Brett Heffes: The Kelce brothers. Travis Kelce.

Jim Gillies: Travis Kelce.

Brett Heffes: The football players, Kansas City Chiefs. They’re talking on their podcast about buying their street hockey gear from Play it Again Sports when they were a kid in Cleveland. A few weeks later, J.J. Watt, NFL player, 5.6 million followers on Instagram, he and his brother are talking about playing hockey in Wisconsin, Play it Against Sports. When Wayne Gretzky wanted to sell some of his hockey equipment, I don’t know if he called or someone on his team called, [laughs] but talk about, how inspiring is it to our whole company that the great one’s a customer of ours. We’re just finding that success begets success, and what’s been going on with the, Play it Again 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 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 Again Sports.

Jim Gillies: I want to go in a capital allocation direction if that’s OK.

Brett Heffes: I figured.

Jim Gillies: We can’t reiterate the last time we had one of these, so we have to go down a little bit of different roads occasionally, but the way I look at your company and I know, you know this. But this is for members and for people maybe just hearing about Winmark 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. As evidenced, 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, your history of buybacks from time to time. Let’s talk of share buybacks. Can you talk a little bit about your philosophy of capital allocation so people don’t also have to infer from mine? You’ve got some debt. We have some voices on our team that say, why have they got so much debt? You buy back stock at certain times, but not at others. Can you expound on some of those decisions?

Brett Heffes: Sure. This can go a lot of different directions. We did touch on this the last time, but we got 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.

Jim Gillies: Fair.

Brett Heffes: 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. 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 executing this because it’s not something that takes a lot of time, but I’m happy to do it, I understand how important it is. 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 long term contracts, we have high renewal rates, and within a band, it’s relatively predictable in terms of what our royalties will be. Modest amounts of leverage are prudent for us. The other thing is we don’t want to hold onto excess cash, and I don’t have any problem saying that out loud. I’ve 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. I think that is, has the potential to be a very large value destroyer. My job is to create value, not to destroy value. 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 lived through that. 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 our team can find something, Renae Gaudette, our COO, Tony Ishaug, 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. Our next three things we can do is pay down debt, buy stock, or do dividend. Let me come back to the debt because I think it’s a different discussion, but if you look at buybacks, we believe long term, the best thing we can do for shareholders is buyback stock at an attractive price.

Jim Gillies: I think the keywords there are at that attractive price. I like that you caveated that.

Brett Heffes: We just believe that long term buybacks create more value than dividends. That’s why we do the math Jim. I’m chair and I’m a fiduciary, I have a responsibility to execute a business strategy and execute capital transactions that I believe are in the best interest of all shareholders and overpaying for stock is just something I can support. I’ve never met a shareholder that disagreed with us on that ever. Now, we may have different assumptions than you. 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. We run these models. Model says, pay X dollars per share, we pay X or less. I can’t comprehend why a capable executive managing a public company on behalf of shareholders would pay a premium to their own estimate of fair value.

Jim Gillies: I have some bad news, Brett, about certain companies. I wanted to talk a little bit about some of my notes here, is getting alignment between various parties. Shareholders, you’re dealing with a lot of folks, you’re dealing. Internally, you’re dealing with a lot of franchisees, you’re dealing with your own employers, how are you walking that tightrope?

Brett Heffes: It’s challenging at times and I really think about it as a Venn diagram. We have a lot of people we’re responsible to, and it’s franchisees, shareholders, and employees. There is a meeting in the middle there that everyone benefits the same and that’s the balance, that’s my job, that’s what we’re trying to strike. 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 strong franchise partners, we need shareholders, and we need employees. 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. 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’re only successful if our franchisees are successful. Our only meaningful form of compensation is a weekly continuing fee that we get based on their percentage of sales. There are franchise fees, there’s some marketing, there’s other funds, but they’re not profit centers for us. 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. It’s very clear to the franchisees that we’re in it together. The only way we do better as if they do better. Impossible to have a scenario where a franchisee’s sales go down and our royalties go up. Impossible. That is really helpful just in the dialogue and in the relationship. I think that from a franchisee perspective that’s key. From a shareholder perspective, the management team here are owners. I don’t know what better way to get aligned. If you look at me and Tony and Renae, the last proxy, I don’t know the exact numbers, but I want to say I own 50 times my base salary and stock. Renae owns 15 times and Tony owns 30 times. If we execute bad ideas it’s going to hurt us a lot more than anybody else. There may be one individual that’s going to get hurt more than us. It doesn’t mean we’re going to be right all the time, but we’re all paying attention. I think that ownership and it’s ownership stakes that have been built up over long careers, 21 years for me, 29 years for Renae,16 years for Tony. Our skin is in the game we’re paying attention. I don’t know how to get better alignment than to have all of us be owners in the manner in which we are. Then from an employee perspective, 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 get stay here because you’re good and I’m extremely proud of all those classes, but the other thing that we implemented in the past few years is a profit-sharing plan, 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. Every single person at the company, they know the goals and we’re all moving in the same direction. Our employees understand the culture, the purpose, and our mission, and we’re building this to last and I think we’re aligned with all categories, franchisees, shareholders, and employees. It’s really important to me to get that alignment.

Jim Gillies: Fantastic. I know we’ve gone a 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 it was last July. What is new about, and what should we be looking for that’s new for the future of Winmark, Winmark, the business I should say? Well, stock performance comes from business performance. I’m very interested in our discussing here, the business performance. What are you doing that’s new because run a business well and it translates to positive returns and the opposite, of course, as well. But Winmark has been a pretty good success story for the past couple of decades. What do you have new that’s going on that listeners should know about?

Brett Heffes: I think one thing I’d want to share with listeners is every single employee at this company is thinking about our mission to provide resale for everyone on a regular basis. There are three main components of our mission and we call it the Winmark way, support, sustainability, and stewardship. From a support perspective, our employees completed over 3,000 support visits last year to franchisees. We had a 99% renewal rate. We had a record level of systemwide sales and the highest door count in our history. We completed almost 270 transfers from one owner to another owner over the last five years. 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 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. 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’re packaging this Winmark way to start marketing to franchisees because the name of the game is stewardship. That’s 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 just opening up a hot dog stand in a food courts somewhere. Winmark and our franchisees, we are on the verge of something truly meaningful together, and we want to formalize this and 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. This legacy mindset 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. You think about what a long-term asset in the community means, think about a hospital, a church, a school. We want to put our stores in the community forever. That means as an owner, succession planning is going to be important, and transfer of ownership is critical to the long-term success. 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. 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. That’s what we’re going after. It’s something permanent, it’s something real, and it’s a true legacy business. That’s the probably most exciting thing from an internal Winmark 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.

Jim Gillies: Well, I will say as we move toward wrap-up, Motley Fool likes to espouse long-term ownership, long-term stock. The cliche of which we stole from Buffett, of course, is our favorite holding period is forever. It’s not possible with some will fully admit that, but I don’t know that I’ve ever heard someone in your position when I’m talking to them, talk about multiple centuries, about legacy, but I certainly like hearing that you are thinking about the business for the long term because again, long-term ownership of quality stocks is, I believe, the fastest way to build wealth in North America, Canada being its own country. Anyway, which is where I am.

Brett Heffes: But 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. The bottom line, it’s not about the financial impact of Winmark. We can handle one store closing with the 1,327 you mentioned, but I don’t want that young girl who wants to go get some hockey skates not be able to get them. I don’t want the couple that can’t get their clothes for their date on Saturday night because the Plato’s Closet is closed. I mean it and I’m serious about it, and it’s not just CEO speak, these concepts are going to be in the community forever and that’s success. Anything short of that is not acceptable, that’s a good word to quote, it’s not acceptable.

Jim Gillies: I like that.

Brett Heffes: It’s not adequate.

Jim Gillies: Thank you.

Mary Long: As always, people on the program may have interest in the stocks they talk about. 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.