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Welcome back to Business Breakdowns. Today, we explore a major player in the reseller economy
that is Windmark. You're likely familiar with some of Windmark's brands like Plato's Closet
or Plating End Sports, but together, Windmark operates five brands through a franchising model.
Our guest to Breakdown, Windmark is the current CEO, Brett Hefez. Now, we listen to our audience
and we try to be cognizant of the guest we invite. The overwhelming majority of our audience
prefers investors to management teams. So why did we explore this episode with Brett? Well,
Windmark doesn't host conference calls, and their investor relations are generally limited to
financial reports, some very basic management commentary, and some rare public appearances.
That alone was intriguing to us, but I'd add, when we talked to Brett, it was very clear this was
not an investor relations exercise. So during our conversation, we get into the broader
reseller economy, the dynamics of managing those brands and different franchise brands,
and how Windmark approaches this and thinks about growth. In the back half of the conversation,
I also made sure to talk to Brett about his thoughts on capital allocation, focusing the business,
and yes, on investor communication. Windmark has been a very interesting business to me.
So if you're looking to learn more on top of the episode, don't hesitate to reach out, send me a
message, email, social media, whatever you prefer. Now, please enjoy this breakdown of Windmark.
All right, Brett, excited to have you here on business breakdowns. We have gone into the world
of franchising before, but I think Windmark sits in a very unique category in the resale market
that we certainly haven't covered, and I think it's going to be of interest to our listeners.
I thought we could just start out with an introduction on Windmark. It's not necessarily a household
brand. I think some of its franchises are household brands. So maybe you could just kick us off
there with an introduction to the business. Sure, thanks, Matt. Really appreciate being on the
podcast today. I mean, we talk about Windmark. We're Windmark the resale company, and we believe
we're the resale company. So we're responsible for a network of 1,319 locally owned buying centers
in communities all across North America. And we have a very simple and pure mission to provide
resale for everyone. And we do have five brands. We are more well-known for the individual brands,
like you said. They're Plato's Closet, which is Tina Parall and that's our largest. Once upon
a child, which is Children's Apparel in Hardgudes, we have a pretty big sporting goods business
and play it against sports. And then we have Style Encore, which is Men's and Women's Apparel,
and Music around which is Musical Instruments. Our focus as a company is on value-oriented items.
So think Walmart, Target, Carter's, Old Navy, Adidas, Nike, Under Armor. These are the brands
and the items that really sell well in our stores and the brands that we're buying from our consumers
every day when they come in to the door. So we provide access to quality-used products at value
pricey. And the thing that's so interesting is these lower priced items, they have less places to
go when you're done with them. And unfortunately, they end up in landfills. So as a result of this focus,
we've been doing this for over 35 years. Windmark's been a leader in the circular economy,
and our environmental and community impact is absolutely massive. We've kept 1.7 billion
items out of landfills since 2010 and have returned over a billion in cash to the communities we
serve in the past 24 months alone. And I think the last piece of this is our resale business is
delivered through a franchise model, Matt. We don't have any corporate stores. And we think that
franchising is a very appropriate model for the resale industry. I'm certainly familiar with your
brands played against boards being one major. And I think I will be increasingly familiar with your
brands as I have young children growing up and those clothes, as you mentioned, there's a lot of
use for them and then they have nowhere to go. And I want to get into that resale market a bit more.
It's this interesting as you reference circular economy, which I like that phrasing there. Can you
just share a bit more about what that economy looks like? I think it makes all the sense in the world
that we should be focusing on that more and more as consumers, but just a little snapshot of it as
you seem like you're a key player in that space. And how you would, if you can quantify that
market sizing, any of the dynamics that have gone on in terms of the trends there, it's something
that I think is increasingly important, but maybe not talked about nearly enough. When I joined
Windmark over 21 years ago, I don't even think the word resale was a term that was being used.
We thought of ourselves as a franchise or of concepts that buy and sell gently used goods, but
over the years, the business has evolved, the markets evolved, and there's been a lot of new
entrants. All of these things combined have really dramatically pushed the industry forward.
There's new estimates that come out every year, frankly, sometimes they're hard to believe,
but the most recent numbers that I reviewed were a US secondhand peril market of over 40 billion
with resale accounting for 23 billion of this. We also participate in Canada, and then we participate
in sporting goods and musical instruments. There's not as much data around those categories,
but they're also very, very large markets for previously used items. So in the past, if you look
at the history, the growth of the market was really driven by younger people, by early adopters,
and value-conscious consumers, but it's pretty clear now that there is just very widespread
participation in this market, and a recent study that I reviewed shared that over 50% of
consumers shop secondhand peril in 2023. So it's very wide in terms of participation.
There's a few other things to touch on about the variety of the business models. I think it
warrant some discussion, because not all resale companies are created equal. And we've defined a
very specific positioning in the industry. I mentioned earlier, we believe we're when marked
the resale company, because true resale is what we do. Our stores buy and sell used items on a daily
basis, and we believe we're the only company doing this at scale. So what that means is we pay
you cash for your items. And on average, each store paid out over $400,000 in cash to customers in
the community. That's over $1,100 a day they're paying out. We focus on the value end of the spectrum,
and that's why we're set up the way we are, because we can actually buy and sell low-priced items
profitably for our free-on-chisees. And we think that for those class of goods, it's the most
sustainable option. There's no packaging, there's no shipping, there's no robots moving around the
warehouse. And more importantly, the goods get shipped into the community once, and they stay there.
There are a variety of other models. Some of them are very different than ours.
Consignment is a big one. That's a concept that we get confused sometimes. People think we're
consignment company, but consignment is a big area. And that's where the players in the marketplace,
they're not principles, they're agents. So you'll see companies touting terms such as take rate,
or GMV, or other metrics. And when you hear companies saying that, it just means that they don't
take ownership of the inventory, and there's less certainty for the consumer. You bring in your
kids' clothes to our store. We'll tell you we want to buy it, we don't want to buy it, here's the
price. So it's very clear. The other models just don't provide that certainty. And to be clear,
they're very valid models. They're more prevalent than ours, frankly. They're just different.
There's a donation model out there. Everyone in the States at least knows about goodwill or
salvation army or savers. It's a very different business model because they're not paying for
their inventory. They're getting it as a donation, but it's also very good for the environment,
because they handled huge volumes. And then there's a peer-to-peer business. Think about Facebook
marketplace, Poshmark eBay. That's when you do the work on your own. You're going to list that
item yourself, typically better for higher priced items, because you're not going to take the time
and energy to do that for two or three dollar item. And then brands themselves are starting to get
into this as well. Because when you're a brand, a branded apparel company, a branded sporting
good company, you make a person, you make quality items that have a long life. Right now, they're
only getting renumeration one time when it gets sold. So all the brands are trying to figure out
how do I participate in the second, third and fourth time, the goods trade at hands. And we've
started some sustainability partnerships in the sporting good business with Rawlings Baseball,
with CCM Hockey, and in the Disc Golf business with ANOVA and Elon Skies. And we're able to showcase
these brands as sustainable options. So they feel good about working with us and consumers feel
good about shopping with them. A major competitor, though, and I still think the biggest competitor to
us is the landfill. Because still too many people just don't take the time to pursue one of these
options or they're not aware of these options. I think the industry needs to be very focused on
being more convenient so that more customers can responsibly dispose of their items.
You pointed to an interesting differentiation point for your business versus the rest of the
industry. And that is that you take ownership of the items you put the cash out. I'm wondering
how do you work with your franchisees in order to make those purchasing decisions? Can you just
kind of bring us into the store experience that is managing risk in some ways in terms of putting
cash out and ensuring that you can then resell that item on the back end. How is the system set up
such that you can educate your franchisees and the business owners in order to do that effectively?
We've been developing a point of sale system for over 20 years. And that pricing matrix in terms of
what to pay is inherent in that point of sale system. If we wanted to, we could teach you how to buy
under 30 minutes. It's that easy. So we look at the style, the brand, the condition, and there's
sort of standard retail price points that we know consumers want to hit. So with a few touches of
the touchscreen, it really points out what to pay for the item and what the item will sell for.
So it doesn't need a big team of data scientists. It's really not that complicated, but it's a ton of
brands. It's a ton of price points, and it's all organized really easily for the franchisee.
And now we also support the franchisee with training, with style and trend guides, what to buy,
what not to buy, because there is fashion component to this. And we do our best to stay on top of those,
and also to continually communicate with the franchisees about what's working. We have a very good
understanding of what brands are selling, what brands are not selling, and passing that through
the system. And do the franchisees ultimately have the decision-making capability such that when
it comes into items where they are more fashion oriented, they can make the decision are their guard
rail setup, because it is a tight relationship where you both rely on one another. And I just
curious how much leeway they have when it comes to those decisions. All the purchasing decisions
at the point of attack are the franchisees. So it's 100% theirs. We have the system in place,
we train them how to do it, but ultimately they make the call on what to buy because it's their
capital. It's really easy for me to sit here and say buy this by that, but it's not my capital,
it's theirs. So they take that responsibility very seriously. The worst thing we can do for a
customer is turn away an item that's a quality item, because then they lose confidence in that store
in that location. So our stores really want to buy everything they can. We train them to want to buy
everything they can, but sometimes they can't. How you communicate that to a customer is a really
important part of the training because we don't want people to feel bad. We're not judging the
quality of their items or their lifestyle or anything. We're just saying, hey, this particular item
isn't going to sell well in our stores today. So we're not going to be able to purchase it.
And is all of the inventory then managed? I assume at the local level as well.
Oh, absolutely, absolutely. That's one of the keys of our business model at Winmark. I mean,
the reason why I think franchising is the right model for this business is because each store's
paying out that $1,100 a day. It's their capital. They're hiring the people. And when they buy,
when they have an excess inventory, they need to figure out how to clear it and we help them with
that. It's this network. You're not on your own when you're in the local market because you have
1,318 other colleagues all around North America. But sometimes they feel like they're alone.
And that's the give and take of being a franchise or a franchise. I don't think this would work
at a corporate level to have a bunch of corporate employees trying to commit capital on behalf of the
mothership. No, I certainly agree with you. There's some unique aspects to skin in the game and
allowing that decentralized management while also having the centralized education system and
everything that goes into that. Maybe we can transition a little bit into the business model itself.
I understand there's kind of a royalty stream that comes up. But when you think about operating
the business, you described how many franchises you have, how would you walk through the business
model and any important components to it when you're thinking about it? There's a couple of things.
I think the one thing that we need to do a better job as a company is our customers, our families,
their individuals. In the apparel business, we can serve men and women's fashion needs from
newborn to retiree. If we're doing our job right in the community, we can acquire you as a newborn
customer and keep you for more than 50 years. The span of it doesn't really get talked about all
the time, but it's really impressive in terms of there's not many businesses where you can keep
a customer for that long. Maybe a toothpaste or consumer products or something like that. But
in our world, there's really not that many out there. If you think about the business model,
the vehicle for which we provide our services is franchising and at its most basic level,
think of it as a distributed system of locally owned buying centers. I touched on that before.
All we want our stores to do is advertise, bring us your gently used items and we'll pay you cash
on the spot. If you treat them well, if you're fair, if you evaluate the items, you pay them cash
for the things that will sell well in the store. If you communicate why we're not purchasing the
things we can't purchase and you educate them on how it all works, they buy also and they buy a lot.
So we buy the inventory, those goods get put on the shelf and they get sold from like 50 to 80%
off a regular retail for the comparable new product and customers buy a lot of it. 1.6 billion
almost in sales last year alone. So it's a really straightforward model. I mentioned alignment before,
but we're 100% aligned with our franchisees. The only way we're successful at win-mark is if
they're successful. There's no possible way for us to be successful without them being successful,
because as you reference, our only meaningful form of compensation are those continuing fees
based on sales. So it's very powerful because what it means is that our entire company is focused
on supporting the franchisees. We don't have any locations, any corporate locations to kind of
change our focus. And when you're all about teaching and training and support, you really approach
things differently because I can tell you that every employee at this company comes into work every
day trying to answer one question. How can I help the franchisees get better? That's all we care
about. We completed over 3,000 support visits last year. And that's why we had a 99% renewal
rate last year and we had our highest level of system wide sales. So the business model is pretty
straightforward and that's about it. The description there in terms of how you're bringing
customers into the store through buying items, we talk a lot about unique customer acquisition
strategies and it's definitely one that fits into there. It ultimately turns into a positive
cack in a lot of ways where you get that inventory on hand. Are there any data points just in terms of
what set of the customers are both selling and buying? I would imagine that a large percentage
are on both sides of the transaction over time. Yeah, Ton, I mean, it varies by brand but you're
well over 50% well over 50% are both and that's the sweet spot for us. I don't believe that anyone
is going to only buy used or only buy new. On the end of the bell curve, you have people doing that
today. Some people still won't buy new and there are emerging people, a lot of influencers on
Instagram that are only buying previously used. But the middle two thirds of the bell curve
today, I think for quite some time are going to be hybrid users. Your earlier point on maintaining
a customer through their entire life, that journey. As you have it set up now, each of the franchises
have their separate brands. Is there anything that you do strategically to allow that natural
evolution to keep the customer jumping from franchise to franchise? That's harder to do on a
national level. Matt, if I could wave my magic wand, I'm open. If you got any ideas for me, I'm
open. It's more about the newborn comes into once upon a child. They hit 12 or 13. They go over to
Playlist Closet. They hit 25 to 30. They go over to Style Encore. It's more about being in the
community that has all three. So we're not there yet on a master plan to do that, but it's just
naturally occurring. But yeah, I'm really open. Any thoughts? Shoot me a text or something.
I only ask the questions. I don't have the answers. That's how this is set up. Yeah.
It's fair. You need to have the places at the very least. When you look at the franchisees,
do many of them own several franchises? What does it look like in terms of owning multiple franchises?
Yeah. I mean, there are. We have about 940 franchisees at this point in time. And we have,
at the end of the year, I mean, the actual number was 1,319 locations. So it's about 1.4 is the
number, but our mode is one. And we really like multi-unit owners, but if they can handle the
second store and the third store, so we have a very cautious, it's not even cautious. It's just
prudent model that we're not going to work with you on the second store until the first store is
working, right? And we're not going to add the second store unless you have an operational plan
to have the second store. Because if you don't have another strong manager or a strong relative
or strong partner in terms of operations, both of them are going to go down. So yeah, we'd like
multi-unit owners, but our mode is clearly one here. And that's also something that's unique
with our winmart is there aren't a lot of franchise concepts out there where you can
be successful with just one concept. And you can here. And so if you want a second store, great.
We work with people all the time, but we don't sign territory deals. You're going to develop 15
stores in a market over a period of time. We've dabbled with that over the years. It's been a
complete and unmitigated disaster for us every time we've tried it. So we're just slow and steady
when's the race is our view. Curious just on what didn't work out with the territorial large build-out.
Was that more institutional capital that was coming in that maybe didn't have that same high touch
neighborhood type approach? Was there anything else that made that result in a failure?
Yeah, I mean, some of this predates me, but some of it occurred on my watch, candidly.
And the stuff that predates me is an entire state was granted to someone. And then if they don't
develop on schedule or they're operating stores that are below system average, it ends up hurting
the brand. And you think it's exciting when you sign them up because you can tout new agreements.
But new agreements that don't open or new agreements that produce below system average harm everybody.
Not only they harm when mark, but they harm all the other franchisees. So we've locked that all down.
Candidly Matt, we get criticized sometimes because people want us to grow faster. And I guarantee you
there's not a person in North America that wants to grow faster than me. I can guarantee that.
But we've also seen the downsides of making bad decisions on picking franchise partners that aren't
qualified. And I look at these people in the eyes. We have a discovery day every other week.
I'm at almost every single one of them. And we talk to them and we say if you follow the model,
you're going to be successful. And I'm just not going to yield on that. I'll take the heat for
the growth rate that maybe people want. They want it a little higher. But I want quality. And you
go back to that renewal rate. And I'm just really comfortable about how we've managed this.
Yeah, there's a great saying. If you default on a million dollar loan, you've got a problem.
If you default on a billion dollar loan, the bank's got a problem. And I think there's some truth
to that that can extend into other industries as well. Yeah. Appreciate the thoughtfulness around that.
When you're looking at those applications, maybe we could just go through the lens of what a
franchisee agreement looks like. Any of the key data points that are important into what they look
like from a length standpoint, what's expected. Any of the metrics that you can point to just in
terms of how those contracts work. There's a qualitative piece that I'd like to just touch on first
because we get so many leads. Some of the leads turn into applications and some of the applications
turn into agreements. It's a classic funnel. But the screening out process, they select out.
Sometimes we select them out. Sometimes it's really focused around operationally qualifying and
financially qualifying. And on the operational piece, we just have to get people to understand
what the actual opportunity is. The job itself is really complex. So we want to uncover for them.
Hey, this is the actual job first. You're the bottle washer. You're the CEO. You're everything.
And you're responsible for financial management. You're responsible for marketing. You're responsible
for operations, staffing, customer service, community relations. So it's not for everybody.
But for the right candidate, it's an amazing opportunity. The other key trait is just follow the
operating model. A lot of what we do is pretty straightforward, Matt. I mean, just follow the
operating model. We got 1300 stores. We've been doing this for 30 years. We and our franchisees
have made every mistake out there. So if you follow that operating model, we think you're going to
have success. So then you get to the point of some of your questions around what's the contract
look like. It's a pretty long legal document. There's a lot of regulations around what we can say
and what we can't say state by state. It's a pretty complex document. But at the end of the day,
it boils down to we're going to license the franchisee our brand name. Windmark owns Plato's
closet. We're going to license you the right to use Plato's closet. And the franchisee's
obligation is to follow the business system that we have in a handbook. So hopefully they come
in. We train them. We teach them the business system. Hopefully they follow the business system.
And the financial piece of it is there's a weekly percent of sales that we get paid. And that's
called the continuing fee. And there's a few other little things here and there. They're not profit
centers for us. That's why I feel like this alignment concept is real because it's just about
that continuing fee. And it's really good to be able to look someone in the eye and say,
if you do better, we do better. It's never a situation where you do worse and we do better.
It's impossible. It's just impossible for that to happen. So it really enhances franchisee
relationships because everything's never perfect. But I think that's the contract. It's really
straightforward. If you want to talk a little bit about some of the traits of successful franchisees,
I think you mentioned that. Yeah, I think it'd be interesting. You mentioned maybe framing it through
the operating manual that if you follow this, that's really the path. Maybe just discussing,
you know, if there's certain things there that are common such that if people aren't doing them,
that's where you often see mistakes are made. Or if they really lean into it, that's where you
see a lot of the successes and blend that with the traits of what makes for a successful operator.
Yeah, I mean, the biggest thing that franchisees sometimes get off the path a little bit on
is what we would call limitations. A lot of inventories coming in and they feel like they have to
slow down and stop buying for a period of time. And we really are all over that as a company and
trying to help educate them why it makes sense and what can happen. And more importantly, how to
help them. Again, no one's saying we don't want to do it your way. It's like we can't for this
reason. Okay, then let's talk about how we can help you. And the other piece I would say in
that operating manual is sometimes people aren't spending the necessary amount on marketing.
The contract states, we talked about the contract that they have to spend 5% of sales on marketing
that our average numbers are a little bit lower than that. And we think that getting that message
out to everybody in the community is really important. And at a minimum, we think that 5% is the
number and that's what they sign up to do. So the limitations in the marketing, I think are the
most common missing. There's a whole host of other things that, you know, wacky things have people
to over the years. But those are the ones that are about 95% of our time spent on helping the franchisees
with. Is there a marketing channel that's most effective for this category in your experience?
Right now, it's digital and social. It's just so cost effective to tell your message that way,
that that is the way when I started, our stores were doing cable TV. That was really effective
back in the day and radio. And there's still some of that, but digital and social is really
the most effective cost effective way for the stores to advertise right now.
I was wondering if I was going to get a direct mail. I still appreciate from time to time.
Depending upon the individual owner in your community, you may, you may get some direct mail. But
it just goes back to what you were talking about, too, as like the traits of a successful,
we have engineers, teachers, people from retail, people from all different walks of life. So it's
not about what your business background is. It's, do you want to be a responsible member of the
community? Do you buy into what we're doing really from a sustainability standpoint? Can you follow
the model? And that's hard for some people that are very entrepreneurial because they want to tweak
things. They want to try something new. And what we really try to get people to do is just run the
model for a few years. Just do it per the handbook. And if you do it per the handbook and you're
starting to have a lot of success and you're trying a new idea, just tell us. We don't sit here
in Minneapolis and think of the next great idea for the store to execute. It'd be an abject failure
if that was my job description. I mean, all the best ideas that have happened at the company,
an operational ideas and local store marketing and they've all happened from franchisees.
So we see something working and then our team and we have some really talented employees and
really talented management team. They figure out what can we package and blow up back out of the
system that can impact hundreds and hundreds of stores. So that's what our skill set is. We're not
terribly smarter than anybody else. We're very disciplined. That's a really good thing to have in
this industry. And we're trying to just get them to follow the model. But the other thing that I've
been thinking about a lot lately actually and I give you credit for this is I was just so intrigued
by the podcast I listened, your business breakdowns podcast on Patek Philippe. And I really believe
that our successful franchisees, they embrace the notion that our stores or legacy assets in the
community because you act differently as an owner. If you think what you're doing is permanent.
It's not just a store that you're going to open and you're going to close. I wish Patek Philippe
would license their tagline to me. I'd love to be able to say like consider that you never actually
own a win-mark franchise you merely look after for the next generation. I mean, that is a wow. That's
a powerful marketing message. And it's why it truly breaks my heart when a store closes. It's not
because of the financial impact to us. We've 1300 stores like one store closing from a financial
standpoint. It's not going to impact us. But you have young families that now don't have access
to our clothes, which is a problem. You have a couple going on a date that are teenagers for the
first time that they want a new outfit and they can't go or young kids playing hockey that can't
get those new skates anymore. So that's the piece that we're trying to even amp up even more. We're
starting to train on this when franchisees come in for new training. We're starting to roll this out
for existing franchisees. You own a legacy asset for your community. And let's make sure that we're
being proper stewards of these assets because it's the community that's really benefiting from this.
A heck of a lot more than you as the owner or win-mark as the franchise or. So thank you for that
inspiration. Yes, yeah, inspiring on many levels for sure that podcast. The renewal rate that you
mentioned before 99% plus speaks for itself. I'm curious over time, have you had large swings in
that number? And anything in terms of that trend line that you watch or monitor very closely,
it can obviously be due to macro reasons from time to time. But just that number and obviously you
want that to be as high as possible to fill that description that you just gave. The single most
important metric of the company is renewal rate. It speaks to franchisee health. It speaks to
franchisee relations. You know, they sign 10-year agreements. We sign 10-year agreements with the
franchisees. And at the end of the 10 years, they have a choice to extend and we have a choice to
extend. 10 years a long time. And last year, we renewed 176 of 177 agreements that were available.
99.4%. If you look over the past five years, it's 99.2%. We renewed 622 out of 627. We really
focus in on these numbers. I know these numbers because it's really important to the whole company.
And we're really proud of this. But if you look at over the past 10 years to answer the question
about variability, our highest renewal rate was 100%. Our lowest was 97.4%. So we really haven't
had situations where on mass things weren't working out. We try to really identify early. If we have
a real focus on stores that are under a certain dollar threshold and try to work with them to sell,
we have a very active M&A operation here where we transfer stores from existing owners to new owners.
And so we try to identify the problems and help people get out gracefully before it comes to
the end of their renewal and it's bad for everybody and bad for the community. Bring it back to
an earlier point you made with the manual. And one of the things that you will see sometimes is
people will stop buying if they're overloaded with inventory or there's too much coming in.
How do you help manage that? Because obviously, I would imagine that there are periods of time where
you're just seeing more selling than buying. Is that ever a risk? Is it just something where
it always ends up balancing out on the other side of it? Through previous cycles doesn't feel like
we've had a really ugly macro cycle in a while. But through previous cycles, has that ever caused
real stress on individual business operators? It's definitely caused stress on individual stores.
It's never been prevalent across the whole concept if that makes sense. So,
part of it is, are you set up properly? Is your back counter organized properly? Are you staffed
properly? There's just a lot of organizational things like how you're set up. It's not due to
the economy. We believe it's more operational in nature. It's more mindset in nature. Are you
understanding that when you hang up that sign and says that we're not buying today? How much
that negatively impacts the consumer experience? I do want to transition a little bit to how you manage
the corporate business. We've talked a lot about the existing model today. I know there was a
fairly large change several years ago where you had an existing leasing business and decided to
part ways with that or wind that down. Can you just bring us into the decision making and thought
process behind something like that? Maybe introduce us to what the leasing business was and then the
decision to ultimately part with it? We don't do a lot of investor relations. No analyst coverage,
no calls. This is not a question I've ever talked about publicly before. It was a really hard
decision, but it was a very necessary decision that I think is worth delving into. I really appreciate
that you want to talk about that. We've discussed that our current mission is to provide resale for
everyone and all the work we put into the rebranding and the refocusing of the company. I attribute
a lot of our recent success to those initiatives in that focus. In the past, if we were having this
conversation 10 years ago, our overall strategy was different. The sign behind me would have said,
create support finance business. That was our tagline. It was a very elegant way to connect
two businesses that really didn't have anything in common, franchising and leasing. Our leasing
operations, we started a small ticket and a middle market equipment leasing operation in 2004.
The plan at the time, I mean, I literally can't believe it was 20 years ago because I was here
when that happened. April won in 2004. It was to take the cash flow from the franchising business
and deploy it in a really high returning finance product. We started down that path.
2008 and 2009 came and that put a really big dent in our small ticket business. That was
smaller transactions for small businesses. That piece of the business ended up being a real value
detractor for win mark. We focused, we shrunk that down after that period of time and had a very
small portfolio, but profitable portfolio. We focused our effort on that middle market business
where we were supplying technology equipment to middle market companies, private equity
back companies, venture back companies, younger public companies. As a business, we financed over
$300 million. We purchased $300 million of equipment on behalf of our customers. Keep in mind that
when we started that business, our market cap was $140 million. It was very substantial to us.
It was over 70% of our balance sheet and it was over 20% of our earnings per share.
The other piece of it was, I don't have a time clock or anything, but I estimate that
I've probably spent 30 to 40% of my time on these businesses. If you step back from all that,
it was a key part of our strategy. You say, why did we make this decision? What really happened
was twofold. I think the first was, just candidly, we never were able to grow the leasing business
fast enough to utilize the cash flow from fancizing. We just never met our goals for customer acquisition.
Actually, I would say we consistently missed our goals for adding new customers. But we still
ended up with a small but very profitable business. It was an extremely profitable business if you
go back and look at the numbers, but it then it required no capital. So we had two businesses
then that required no capital. But the most important thing to me was if you look at this sustained
period of time, I mean, this isn't a one month or one year decision, you look at 20 year period of time,
the core resale business. I mean, I think you can just hear it in my voice. It just vastly exceeded
all of our expectations. And I just didn't think it was getting enough attention. And if you look
back at our history from 2002 to 2021, we had a lot of different corporate development ideas here.
We made minority investments in private companies. We started two leasing businesses at a very
pivotal time in our history. We chose to start a franchise consulting business to find the next
great idea and franchising. And throughout all this, I just kept coming back to and the management
team kept coming back to the core. And it just got to the point of just answering a very simple
question, where should we be spending our time? It just became crystal clear. So in 2020,
we sold the small ticket lease portfolio. We shut down the franchise consulting business.
These moves are very necessary during COVID. We need to put 110% of our effort into the
franchisees and to our employees during COVID. And then after that, the actual business decision
was sort of a no brainer to run it off. We rebranded the company. We redefined the mission and we
were on our way. I can really tell you, since we've done this, the quality of the ideas, the desire,
the ability to invest more in the business is a direct result of focusing all of our efforts
on the reselling industry. And the problem is these decisions, they're never easy because it
impacts people. But now that it's three years in the river, Mira, I truly believe it's probably
the most important decision we've made in the past 10 years and maybe perhaps the past 20 years.
We've never been more aligned with our franchisees, with our employees, with our shareholders.
And I think we have absolute clarity regarding who we are and why we are here. I think our success
is directly related to that. That's the progression. It wasn't a bad idea just so we're clear. And it
ended up combined, being very profitable for our shareholders to be in those businesses. But the core
or resale business is really positive. So yeah, listening to the first 40 minutes of the conversation,
there was so much strategy and thought and focus on that business then to hear that there was this
tangential business, which is related but very separate. It makes sense and ties into the answer,
I think, pretty thoughtfully. And the dynamics of how it could grow and how you're redeploying cash
and how that evolved over time. I want to touch on that a little bit just in terms of how you treat
that capital allocation now with the cash flow that comes off of the franchising business.
How do you approach that just strategically as a manager? I mean, that's a question we get a lot.
As you can imagine, our first tenant of capital allocation is run a good company. Because if you
don't run a good company, there's no capital to allocate. Pretty simple stuff. And we do run a
profitable company. So despite the significant investments we make in marketing and technology,
we do have excess capital every year. And the philosophy is we don't want to retain excess cash
on our balance sheet. And what we first do is we look to find higher returning activities for
investment that are consistent with our core resale operations. And historically, there have been
very limited opportunities to do so. We look at a lot of things. We move forward with very few.
So acquisitions are risky. Some of the minority investments are out there. It's just not things that
we've done so far. It doesn't mean we're never going to do them. So we always look for higher return
risk adjusted activities. But as a result, the primary use of funds has been debt paydown, share
repurchase and special dividends. Right now, we have longer maturity debt at very low rates. So
debt paydown isn't a great option. We have just very attractive financing in place that doesn't
mature for many, many years. So it just doesn't make sense for us to do that. The next progression
goes to share repurchases. We state very disciplined and patient with respect to share repurchase. We
only want to buy our stock in the open market. If it's at evaluation that we deem to be proper,
we've done a lot of this. We've repurchased 4.3 million shares in the last 20 years. We're about
$350 million. We have under 3.5 million shares today. So it's a fairly active program. We don't do
it by a formula. You see a lot of companies out there that are going to buy every quarter or
buy it off set delusion. We don't think that has the potential to lead to good outcomes.
Frankly, 2023 was the first time in 20 years that we didn't repurchase shares. But we do pay
a quarterly dividend, which we think is set to a meaningful level for shareholders that they get a
little payment every quarter. But it's not big enough that it hurts flexibility with some of these
other ideas because I want flexibility to buy back stock or to produce some other ideas that are
value creating for all of us. But when all those things don't happen in any given year,
we're very comfortable, very receptive, paying out special dividends. I've said this before,
but shareholders really enjoy those. Nothing makes your day getting seen in press release that the
company's paying a special dividend. We've paid out special dividends in each of the last four
years, totaling a little under $23 a share. We just think it's a very straightforward policy.
We get a lot of positive feedback from shareholders on how we manage the capital structure and how we
manage the capital allocation. Yeah, we like to refer to that type of share
buyback history as a share cannibalization when you're eating your share count. In 2023, the decision-making
process of no buybacks, but the special dividend, I assume that was what you referenced before,
just on valuation. Yeah. And then the natural question always with the dividend policies and
that tax impact about those, how do you balance that when it comes to the facts effectiveness of
thinking about the buyback relative to dividend and your approach having been in the CFO position
as well to thinking about that? I don't get too hung up. Our CFO Tony doesn't get too hung up
on paying taxes. If the choice is buy stock that we think is not appropriately valued,
keep cash on the balance sheet or give it back to the owners of the company. Taxes does in fact
are into that decision. It's just we're going to give you your money back. It's yours. So we obviously
hope that there's opportunity to buy stock in the future because that's better for all of us if
we continue to do that. But I think it would be very foolish to consistently buy at levels that you
don't think create value. At the end of the day, I'm responsible for running operations of the company
along with Renee Godette, our COO and Tony and I are responsible for allocating the capital. And I
just don't see a path forward where we're overpaying for our shape. No, it's going to be right.
But we've made enough decisions over the years that I'm comfortable being wrong sometimes.
And if the criticism is you should have bought more, I'm okay with that.
Understandable. One of the last questions I had you referenced it before, the investor
relationship side of things, I think you have a unique approach where you don't do much in terms
of conference calls or communications. And I've worked with other businesses that have operated
similarly, expeditors of Washington out on the West Coast, another famous example that a chart
that looks similar to yours has performance doesn't indicate anything about future results.
But just the philosophy behind that and the focus on operations and not being as vocal on calls
events and whatnot. Can you just talk a little bit about what goes into that?
We're a very unique company. One of the characteristics from a shareholder perspective, investor
relations perspective, I think we're unique because 20 shareholders own 74% of the company.
So it doesn't take us a lot to really understand. We wouldn't have to spend $40 million like
Disney did or Pell's did to try to organize that. We would call up two of the top 20 work for the
company. So we pick up the phone and call 18 maybe there's three or four index funds that
wouldn't return the call, but we get to everybody else. So I think that makes it the decision to do
it the way we do it effective. I just really believe that if you're a shareholder, where do you
want me spending my time? Do you want me on a conference call with analysts or trying to
pitch our stock or at an analyst day or do you want me worried about finding the next market?
It being with the franchisee and helping them out. And I've never met a shareholder that doesn't
want me spending my time on the core operations. We talk a lot about capital allocation in these
formats because people are interested in it. It doesn't take up any time in my day. We have the
policy in place. We move forward. So I think for us, we're easy to get a hold of.
Someone wants to call us a shareholder, a prospective shareholder. They call Tony. They call me.
We talk to him. So it's just worked for us that way. And I just like keeping it simple. I've learned
from someone who was really talented at this. I listened very carefully in terms of how he did it.
It works and I'm not going to change it. There's just no reason to change it because it's not like
we suffered from a low valuation. You think we can have a different argument if that were the case.
It's not broke. Don't fix it. I think that's a fair takeaway. And the focus on the business and the
focus on what that core business is. It has been apparent throughout the conversation. We typically
close with lessons from a business and usually it's an investor looking at a business and those
lessons that they could apply elsewhere. But I thought we could just take it even higher level.
The lessons that you've taken away from your career long time spent at WinMark
that you would share at the end of this conversation. I probably have a couple. I think the first
lesson that I would probably say is the most recent lesson and we've touched on it a little bit.
But it's really it's all about the mission. I can't overestimate how important these past three
years have been to WinMark to me personally. And I just think the standard for any company,
for what anyone in my position is looking for and ultimately responsible for is sustained excellence.
I believe that having clarity of purpose as an organization allows for this. It took a very
long time in my career to be responsible for a company like this to define the mission of a
company like this. And I hope the work we've done over the past few years will contribute to
the sustained excellence for our franchisees and employees and the whole network. But when you
have a pure mission, Matt, it really inspires people. It provides clarity. You get to amplify your
message to a much broader audience than you can without it. And everyone knows what their role is.
And it's super powerful. That's probably the most important mission. But I think the other one
I would say it's more on the personal side, but I think professionally, I just think it's really
important to express gratitude in your personal life and your professional life. Right handwritten
thank you notes. It may sound a little cliche, but you know, if you take the time to regularly reflect
on how did I get here and to express gratitude and thanks from the people in your life that have
helped you, I think it's uncommon. Sad little bit that it's uncommon, but my parents taught me
the value of this very simple task when I was a child. And I believe that writing someone a
handwritten note, it can contribute to that relationship and accelerate the formation of that
relationship. Because you're letting that person know that what they did for you is meaningful.
And you're letting that person know that they're worth the time it took for you to write that
letter. And I meet a lot of people in my professional life that they seem to think they did it all in
their own. And I think that's a big mistake because I truly don't think I've ever met anyone that's
done it all in their own. And it's not terribly inspiring behavior. So I just feel very fortunate for
all the people that helped me in my life. And I think that would be a big lesson that I would share
with people as well. I think it's excellent lessons. And I will just say that I completely agree with
you on that handwritten note point. I think that is something that goes a very long way.
This has been an excellent overview of your business, the resale market, everything going on
there. I think there's a lot that the audience will take away in hearing it, but then probably also
viewing their communities a little bit differently. So I appreciate it Brett. Thank you for sharing
all of the knowledge here. Thanks Matt. I really appreciate your time.
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