Brett Heffes is the current CEO of Winmark. We cover how its franchising model works, its prudent and unique approach to capital allocation, and the scale of the market for second-hand apparel more broadly.
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Background and Overview
Winmark, headquartered in Minneapolis, was founded over 35 years ago and has evolved into a leader in the resale market, emphasizing sustainability and community impact. The company operates exclusively through a franchise model, with no corporate-owned stores, and its mission is to “provide resale for everyone.” Its five brands cater to diverse customer segments, from newborns to retirees, offering quality used products at 50-80% off comparable new retail prices. Winmark’s focus on value-oriented brands (e.g., Walmart, Target, Nike) differentiates it from luxury or high-end resale markets.
The company’s network spans North America, with 1,319 stores as of the end of the referenced period, owned by approximately 940 franchisees (an average of 1.4 stores per franchisee). Winmark has kept 1.7 billion items out of landfills since 2010 and returned over $1 billion in cash to communities in the past 24 months by purchasing used goods directly from consumers. This dual focus on environmental sustainability and economic community engagement underscores its role in the circular economy.
Historically, Winmark pursued a broader strategy that included equipment leasing and franchise consulting, but in 2020, it divested these non-core operations to focus exclusively on resale franchising. This strategic refocusing, coupled with a rebranding effort, has driven recent success, aligning the company more closely with its franchisees and shareholders.
Ownership and Valuation
Winmark is a publicly traded company with a concentrated shareholder base: 20 shareholders own 74% of the company, reducing the need for extensive investor relations. The company does not host conference calls or maintain analyst coverage, preferring direct communication with shareholders. While the transcript does not provide a current enterprise value (EV) or valuation multiples, it notes that Winmark’s market capitalization was $140 million in 2004 when it launched its leasing business, which was substantial relative to the $300 million in equipment financed through that operation.
Winmark’s capital allocation strategy emphasizes returning excess cash to shareholders through share repurchases and special dividends, reflecting confidence in its cash-generative business model. Over the past 20 years, the company repurchased 4.3 million shares for $350 million, reducing its share count to under 3.5 million. Additionally, it has paid special dividends totaling $23 per share over the last four years. The absence of share repurchases in 2023 suggests a disciplined approach, prioritizing valuation-driven buybacks over formulaic repurchasing.
Key Products, Services, and Value Proposition
Winmark’s value proposition centers on providing affordable, quality used goods through a franchise model that emphasizes local ownership and community engagement. Each brand targets a specific demographic and product category, creating a broad customer base that spans generations. The key products and services include:
- Plato’s Closet: Teen apparel, the largest brand by store count, focusing on trendy, value-oriented clothing.
- Once Upon A Child: Children’s apparel and hard goods (e.g., strollers, toys), catering to families with young children.
- Play It Again Sports: Sporting goods, including equipment for hockey, baseball, and disc golf, with sustainability partnerships with brands like Rawlings and CCM Hockey.
- Style Encore: Men’s and women’s apparel, targeting adult fashion needs.
- Music Go Round: Musical instruments, a niche but growing segment.
The value proposition is threefold:
- Affordability: Products are sold at 50-80% off comparable new retail prices, appealing to value-conscious consumers.
- Sustainability: By buying and selling used goods locally, Winmark reduces landfill waste and eliminates the need for packaging or shipping, making it a leader in the circular economy.
- Community Impact: Stores pay out an average of $400,000 annually ($1,100 daily) in cash to local consumers for their used items, injecting significant capital into communities.
Unlike consignment or peer-to-peer models, Winmark’s stores take ownership of inventory, paying cash upfront and reselling items directly. This “true resale” model ensures certainty for consumers and franchisees, distinguishing Winmark from competitors like Goodwill (donation-based), Poshmark (peer-to-peer), or consignment platforms that act as agents without owning inventory.
Segments and Revenue Model
Winmark operates a single business segment: franchising in the resale economy. Its revenue model is straightforward, relying primarily on continuing fees (royalties) based on franchisee sales. Key components include:
- Continuing Fees: Franchisees pay a weekly percentage of their gross sales to Winmark. This is the company’s primary revenue stream, aligning its interests with franchisee success. The exact percentage is not disclosed in the transcript, but it is described as the “only meaningful form of compensation.”
- Franchise Fees: Initial fees are charged for new franchise agreements, though these are not a significant revenue driver compared to royalties.
- Other Fees: Minor fees for services like training or technology support exist but are not profit centers, reinforcing alignment with franchisees.
Franchisee stores generated $1.6 billion in system-wide sales last year, indicating the scale of the network. Winmark’s revenue is a fraction of this, derived from the royalty percentage applied to these sales. The transcript does not provide Winmark’s corporate revenue or EBITDA, but the high renewal rate (99.4% last year, 99.2% over five years) and system-wide sales growth suggest a stable and growing revenue base.
Splits and Mix
While the transcript lacks detailed breakdowns of revenue or EBITDA by brand, geography, or customer type, it provides insights into the business’s operational mix:
- Brand Mix: Plato’s Closet is the largest brand, followed by Once Upon A Child and Play It Again Sports. Style Encore and Music Go Round are smaller but contribute to Winmark’s broad demographic coverage. The transcript does not quantify the revenue or store count per brand, but Plato’s Closet’s prominence suggests it drives the majority of system-wide sales.
- Geographic Mix: Winmark operates primarily in the U.S., with some presence in Canada. The U.S. secondhand apparel market is estimated at $40 billion, with resale accounting for $23 billion, indicating a significant domestic focus.
- Customer Mix: Over 50% of customers both sell and buy items, creating a “hybrid user” base that enhances customer retention. The business serves a wide demographic, from newborns (Once Upon A Child) to retirees (Style Encore), with potential for lifelong customer relationships.
- Channel Mix: Stores operate as physical retail locations, with no corporate e-commerce presence. Marketing is primarily digital and social media, which franchisees are contractually obligated to spend 5% of sales on, though actual spending is slightly lower.
Historical mix shifts are not detailed, but the resale market’s growth, driven by younger and value-conscious consumers, suggests increasing adoption across demographics. The 50%+ participation rate in secondhand apparel shopping in 2023 reflects a broadening customer base.
Headline Financials
The transcript provides limited financial data, focusing on system-wide metrics and capital allocation rather than corporate financials. Key figures include:
- System-Wide Sales: $1.6 billion last year, the highest in Winmark’s history, reflecting strong franchisee performance.
- Cash Paid to Communities: Over $1 billion in the past 24 months, with each store paying out an average of $400,000 annually ($1,100 daily).
- Share Repurchases: $350 million over 20 years, reducing shares to under 3.5 million.
- Special Dividends: $23 per share over the last four years.
- Leasing Business (Historical): Financed $300 million in equipment, representing 70% of the balance sheet and 20% of EPS at its peak, but divested in 2020.
Without corporate revenue, EBITDA, or FCF figures, we can infer the following:
- Revenue: Derived from continuing fees as a percentage of $1.6 billion in system-wide sales. Assuming a typical franchise royalty rate of 4-6%, Winmark’s revenue is likely in the $64-96 million range, though this is an estimate.
- EBITDA Margins: The franchise model is capital-light and operationally lean, suggesting high EBITDA margins (likely 50%+), as there are no corporate stores, and costs are primarily related to franchisee support, marketing, and technology.
- FCF: Winmark generates significant free cash flow, as evidenced by its ability to repurchase $350 million in shares and pay $23 per share in special dividends without retaining excess cash. The absence of significant capex (no corporate stores) and low working capital needs enhance FCF conversion.
The leasing business, while profitable, was capital-intensive and diverted management focus. Its divestiture in 2020 freed up resources, boosting FCF and enabling a sharper focus on the core resale business.
Value Chain Position and Go-to-Market Strategy
Winmark operates midstream in the resale value chain, acting as a franchisor that enables local stores to buy and sell used goods. The value chain includes:
- Upstream: Consumers who sell their used items to franchisees, providing inventory.
- Midstream: Winmark’s franchisees, who purchase, curate, and resell goods, and Winmark itself, which provides the brand, systems, and support.
- Downstream: Consumers who purchase affordable, quality used goods.
Winmark’s competitive advantage lies in its franchise model, which decentralizes inventory management and capital deployment to local owners, aligning incentives and reducing corporate overhead. The go-to-market (GTM) strategy is community-driven, with franchisees advertising locally (primarily via digital and social media) to attract sellers and buyers. The “buy-sell” model creates a unique customer acquisition strategy, where paying cash for items draws sellers into stores, over 50% of whom also become buyers.
Customers and Suppliers
- Customers: Winmark serves value-conscious consumers across demographics, with a focus on families, teens, and adults seeking affordable apparel, sporting goods, and musical instruments. The hybrid user base (over 50% sell and buy) enhances retention and reduces customer acquisition costs (CAC). The potential for lifelong customer relationships, from newborn to retiree, is a unique strength.
- Suppliers: Consumers are the primary suppliers, providing used goods directly to franchisees. This eliminates traditional supplier dependencies and costs, as inventory is acquired locally without packaging or shipping.
Pricing and Contract Structure
- Consumer Pricing: Goods are sold at 50-80% off comparable new retail prices, determined by a proprietary point-of-sale system that considers style, brand, condition, and market demand. Franchisees have full discretion over purchasing decisions, ensuring flexibility within Winmark’s pricing guidelines.
- Franchisee Contracts: Franchise agreements are 10-year contracts with a 99.4% renewal rate. Franchisees pay a weekly continuing fee (percentage of sales) and are required to spend 5% of sales on marketing. The alignment of interests ensures Winmark only profits when franchisees succeed.
- Visibility and Predictability: The royalty-based revenue model provides high visibility, as continuing fees are tied to franchisee sales, which have grown to $1.6 billion system-wide. The 99% renewal rate and stable customer base enhance predictability.
Bottoms-Up Drivers
Revenue Model and Drivers
Winmark’s revenue comes from continuing fees, with minor contributions from initial franchise fees and support services. Key drivers include:
- Volume: System-wide sales of $1.6 billion reflect strong consumer demand for affordable used goods. Growth is driven by increasing resale market participation (50%+ of consumers shopped secondhand in 2023), new store openings, and same-store sales growth. The transcript notes the highest system-wide sales ever, indicating acceleration.
- Pricing: Royalty rates are fixed as a percentage of franchisee sales, providing stability. Consumer pricing (50-80% off retail) is driven by brand, condition, and local demand, with franchisees leveraging Winmark’s point-of-sale system for consistency.
- Mix: Plato’s Closet likely dominates sales, followed by Once Upon A Child and Play It Again Sports. Geographic concentration in the U.S. and a broad customer demographic minimize reliance on any single segment or market.
- Organic Growth: Growth is primarily organic, driven by new franchise openings and same-store sales increases. Winmark avoids aggressive territorial development deals, prioritizing quality over quantity, as past attempts at rapid expansion led to underperforming stores.
Cost Structure and Drivers
Winmark’s cost structure is lean, with high operating leverage due to its franchise model:
- Fixed Costs: Include corporate overhead (employee salaries, office expenses), marketing, and technology development (e.g., point-of-sale system). These are spread across 1,319 stores, creating economies of scale. The company completed 3,000 support visits last year, indicating significant investment in franchisee training and support.
- Variable Costs: Minimal, as inventory is managed by franchisees, and Winmark does not bear direct costs of goods sold. Support services (e.g., training, trend guides) scale with franchisee growth but are not profit centers.
- EBITDA Margins: Likely high (50%+), given the capital-light model, lack of corporate stores, and royalty-driven revenue. Margin expansion comes from increasing system-wide sales without proportional cost increases.
- Operating Leverage: As sales grow, fixed costs (e.g., technology, support staff) become a smaller percentage of revenue, driving margin expansion. The franchise model outsources variable costs to franchisees, enhancing corporate profitability.
FCF Drivers
Winmark’s FCF is robust due to:
- High EBITDA Conversion: Low capex (no corporate stores) and minimal working capital needs (no inventory or receivables) result in strong cash conversion.
- Capex: Negligible, as franchisees bear store-level capital expenditures (e.g., rent, fixtures).
- NWC: Minimal, as royalty payments are collected weekly, and there are no significant inventory or receivables cycles.
- Capital Deployment: Excess FCF is returned via share repurchases ($350 million over 20 years) and special dividends ($23 per share over four years). The absence of repurchases in 2023 suggests valuation discipline, prioritizing special dividends when stock is deemed overvalued.
Market and Competitive Landscape
Market Size and Growth
The U.S. secondhand apparel market is valued at $40 billion, with resale accounting for $23 billion. Sporting goods and musical instruments are also significant but less quantified. Market growth is driven by:
- Volume: Increasing consumer participation (50%+ shopped secondhand in 2023), particularly among younger and value-conscious demographics.
- Price: Stable pricing for used goods, with discounts of 50-80% off retail sustaining demand.
- Industry Drivers: Environmental awareness, cost-conscious consumer behavior, and the shift toward circular economy models.
Market Structure
The resale market is fragmented, with diverse business models:
- True Resale: Winmark is the only company buying and selling low-priced used goods at scale, taking ownership of inventory.
- Consignment: Players like ThredUp act as agents, earning take rates without owning inventory, leading to less certainty for consumers.
- Donation-Based: Goodwill and Salvation Army handle high volumes but do not pay for inventory, limiting community cash flow.
- Peer-to-Peer: Platforms like eBay and Poshmark cater to higher-priced items, unsuitable for Winmark’s low-price focus.
- Brand-Owned Resale: Brands like Rawlings and CCM are entering resale through partnerships, but their scale is limited.
The market’s minimum efficient scale (MES) is relatively low for physical resale, allowing numerous small players. However, Winmark’s scale (1,319 stores) and brand recognition create a defensible position.
Competitive Positioning
Winmark’s positioning is unique due to:
- True Resale Model: Buying and selling low-priced goods locally, with cash payments to consumers, differentiates it from consignment, donation, or peer-to-peer models.
- Franchise Network: Local ownership ensures community engagement and operational flexibility, unlike corporate-run models.
- Sustainability: Keeping 1.7 billion items out of landfills since 2010 positions Winmark as a leader in the circular economy.
- Customer Retention: Over 50% of customers sell and buy, creating a low-CAC, high-retention model.
Hamilton’s 7 Powers Analysis
- Economies of Scale: Winmark’s 1,319 stores and centralized systems (e.g., point-of-sale, training) spread fixed costs, creating a cost advantage over smaller players. The franchise model outsources variable costs, enhancing scalability.
- Network Effects: Limited direct network effects, but the franchisee network fosters knowledge sharing, with successful strategies disseminated across stores.
- Branding: Brands like Plato’s Closet and Play It Again Sports are well-recognized in their niches, commanding customer trust and loyalty.
- Counter-Positioning: The true resale model, with cash payments and local inventory management, is difficult for consignment or e-commerce competitors to replicate at scale for low-priced goods.
- Cornered Resource: Winmark’s proprietary point-of-sale system, refined over 20 years, provides franchisees with a competitive edge in pricing and inventory management.
- Process Power: Standardized training, trend guides, and support visits (3,000 last year) ensure consistent execution across franchisees, difficult for competitors to match without a similar franchise network.
- Switching Costs: High renewal rates (99.4%) reflect franchisee loyalty, driven by Winmark’s alignment and support. Customer switching costs are moderate, as alternatives (e.g., Goodwill, eBay) exist, but Winmark’s convenience and cash payments create stickiness.
Strategic Logic
Winmark’s strategy emphasizes quality over rapid growth, prioritizing franchisee success and sustainability. Key elements include:
- Franchisee Alignment: The royalty-based model ensures Winmark only profits when franchisees succeed, fostering trust and a 99.4% renewal rate.
- Focus on Core Operations: Divesting the leasing and consulting businesses in 2020 sharpened focus on resale, driving system-wide sales to $1.6 billion.
- Capital Allocation Discipline: Returning excess cash via repurchases and dividends, rather than pursuing risky acquisitions, preserves shareholder value.
- Sustainability Leadership: Partnerships with brands like Rawlings and CCM enhance Winmark’s environmental credentials, aligning with consumer trends.
- Community Legacy: Framing stores as “legacy assets” encourages franchisees to prioritize long-term community impact, reducing closures and enhancing brand reputation.
The decision to avoid territorial development deals reflects a strategic aversion to overexpansion, which previously led to underperforming stores. Winmark’s minimum efficient scale is achieved through its current network, and further growth is pursued cautiously to avoid diseconomies of scale.
Key Takeaways and Unique Dynamics
- True Resale Model: Winmark’s practice of buying and selling low-priced goods with cash payments is unique, enabling profitable handling of value-oriented items that competitors like consignment or peer-to-peer platforms avoid. This model minimizes environmental impact (no shipping or packaging) and maximizes community cash flow ($1 billion in 24 months).
- Franchise-Driven Scalability: The franchise model decentralizes capital and operational risks to local owners, aligning incentives and creating operating leverage. Winmark’s focus on franchisee support (3,000 visits, 99.4% renewal rate) ensures consistent execution and high profitability.
- Customer Acquisition Synergy: Paying cash for used items draws consumers into stores, with over 50% becoming buyers, creating a positive CAC dynamic. The potential for lifelong customer relationships (newborn to retiree) is a rare strength.
- Sustainability and Community Impact: Keeping 1.7 billion items out of landfills and returning $1 billion to communities positions Winmark as a leader in the circular economy, resonating with growing consumer demand for sustainable options.
- Capital-Light, Cash-Generative Model: With no corporate stores, minimal capex, and high FCF conversion, Winmark generates significant excess cash, enabling $350 million in repurchases and $23 per share in dividends while maintaining flexibility for strategic investments.
- Disciplined Growth: Avoiding rapid expansion and focusing on quality franchisees protects brand integrity and sustains high renewal rates, even if it draws criticism for slower growth.
Conclusion
Winmark’s business model is a masterclass in alignment, sustainability, and capital efficiency. Its true resale model, franchise-driven scalability, and community-focused GTM strategy create a defensible position in the $40 billion secondhand market. The company’s high renewal rates, robust FCF, and disciplined capital allocation reflect operational excellence and strategic clarity, particularly following the divestiture of non-core operations. By prioritizing franchisee success and environmental impact, Winmark not only drives financial performance but also delivers meaningful social value, making it a standout in the resale economy.
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