This piece explains how Winmark runs a franchise model for secondhand goods – it doesn't own inventory, just collects royalties. CEO Brett Heffes says Winmark is the only company that profitably buys and sells low-priced used items at scale, while other models (like consignment or peer-to-peer) can't handle cheap items. He sees the biggest rival as landfills. Key holdings: Winmark (WINA, 99% franchise renewal, buybacks and special dividends), Plato's Closet (teen apparel, core brand), and Play It Again Sports (sports equipment, large business).
Guest: Winmark CEO Brett Heffes. Main theme: The company operates five second-hand brands including Plato’s Closet through a franchise model, holds no inventory, and generates stable income from royalties. Most impactful judgment of the entire interview: Brett Heffes believes that Winmark is the only company in the second-hand economy that "does true resale at scale," and its core moat lies in being able to profitably process the buying and selling of "low-priced goods," which other models (such as consignment, P2P) find difficult to replicate.
Brett Heffes believes that Winmark's business model is unique and sustainable within the second-hand economy because it solves the circulation problem of "low-priced goods," which forms its core moat.
Heffes categorizes the second-hand economy into four models: 1) Buy/Sell (Winmark model) — stores directly purchase second-hand goods from consumers with cash, then resell them; 2) Consignment — the platform acts as an agent and does not hold inventory; 3) Donation — such as Goodwill, which does not pay for inventory costs; 4) Peer-to-Peer (P2P) — such as eBay and Facebook Marketplace, where consumers complete transactions themselves. He points out that the P2P model is more suitable for high-priced goods, because "you wouldn't spend time and effort selling a $2 or $3 item." Winmark's low-price positioning (goods typically discounted 50–80% off original price) is precisely its advantage, as its business model can "profitably buy and sell low-priced goods," which other models cannot do.
Heffes explicitly states that the company's biggest competitor is not other second-hand platforms, but "the landfill." Because too many consumers still choose to discard items directly due to insufficient convenience or lack of awareness. Therefore, the core task of the industry is to improve convenience, enabling consumers to "dispose of items responsibly."
Inference and Verification: The sustainability of this positioning depends on two key assumptions: 1) Demand and supply for low-priced goods remain substantial (over 50% of consumers purchased second-hand clothing in 2023); 2) The company's franchisee network can continue to efficiently process daily cash transactions exceeding $1,100 per store. If a new model that can equally efficiently handle low-priced goods emerges, this moat will face challenges.
Brett Heffes describes Winmark's growth strategy as "careful franchisee selection" rather than "aggressive regional expansion", with a core metric of 99% franchise renewal rate.
Heffes emphasizes that the company does not pursue rapid growth in store count, but focuses on "quality". He admits that the company has been criticized for its slow growth, but he would rather bear that pressure than make "bad franchisee choices". He criticizes the "area development agreement" strategy, calling it a "complete and total disaster" because it leads to franchisees lagging behind in development or operating below the system average, thereby harming the brand and other franchisees.
Heffes introduces a key concept: "legacy asset". Borrowing a tagline from Patek Philippe, he believes that successful franchisees should view their stores as a "permanent asset" for the community. "You never actually own a Winmark store; you are merely looking after it for the next generation." This philosophy fundamentally changes the business mindset, shifting from short-term profit orientation to long-term responsibility, which is also the reason why the company maintains a high renewal rate — over the past five years, Winmark has renewed 622 out of 627 agreements, a renewal rate of 99.2%.
Deduction and Verification: The risk of this model is that if the macro economy remains weak, it will put pressure on franchisees. Historically, the company's lowest renewal rate was 97.4%. Heffes believes that the difficulties faced by stores are more "operational" than "economic". The key metric to verify this logic is: whether the franchise renewal rate can be sustained above 99%; at the same time, whether the 1% that is eliminated results from the company's active selection rather than franchisee operational failure.
CEO Brett Heffes described the company's most important strategic decision of the past decade: divesting the non-core leasing business and establishing a capital allocation system centered on 'shareholder returns.'
Heffes noted that the company once had a fairly large equipment leasing business (accounting for 70% of the company's balance sheet and 20% of earnings per share), but this business never effectively utilized the cash flow generated by the franchise operations and continuously distracted management (he estimated he spent 30-40% of his time on it). After 20 years of observation, Heffes believes the core used-goods business performed 'far better than expected,' while the leasing business was a 'value detractor.' Therefore, the company sold its small leasing business in 2020, fully focusing on the mission of 'providing used goods for everyone.' He considers this 'the most important decision of the past 10 years, and possibly even the past 20 years.'
In terms of capital allocation, Heffes clarified a 'three-layer return' priority: 1) investment in high-return projects in the core business (but with limited opportunities); 2) stock buybacks (only when valuations are appropriate); 3) dividends (regular + special dividends). He specifically emphasized that buybacks are not 'formulaic' and will not be blindly conducted to offset dilution. In 2023, the company did not conduct buybacks due to valuation reasons and instead paid a special dividend. Over the past 20 years, the company has repurchased 4.3 million shares at a cost of approximately $350 million, and the current number of shares outstanding has fallen below 3.5 million.
Deduction and Verification: The core of this strategy is 'discipline.' If the company is unable to find high-return core business investment opportunities in the future, its capital allocation will primarily manifest as share buybacks or special dividends. Investors need to pay attention to: whether the company can find new, sustainable internal investment opportunities while maintaining high renewal rates in its core business, or whether it can only reward shareholders through buybacks and dividends, thereby turning the company into a 'value' rather than a 'growth' company.
| Ticker | Analyst Sentiment | Key Data |
|---|---|---|
| Winmark (WINA) | Bullish (Insider Perspective) | 1,319 stores; system sales ~$1.6B; 99% renewal rate; 627/627 renewals over past 5 years; 4.3M shares / $350M repurchased over past 20 years |
| Plato’s Closet | Bullish (Core Brand) | Largest brand, focused on teen apparel |
| Play It Again Sports | Bullish (Core Brand) | Large sporting goods business |
| Partner Brands (Rawlings, CCM, Inova, Elon) | Neutral (Partnerships) | Established sustainable partnerships in sporting goods business |
| Landfills | Biggest Competitor | The primary and most critical competitor the company seeks to address |
1. The only moat in the second-hand economy is the ability to profitably handle "low-price goods." (Brett Heffes) – Winmark's model is "true second-hand buying and selling," while other models (P2P, consignment) cannot efficiently handle low-price goods, which is its core moat.
2. The "slow is fast" franchisee selection strategy. (Brett Heffes) – The company rejects area development agreements, calling them "a complete, total disaster." It prefers slower growth to ensure franchisee quality, otherwise it would harm the brand and all other franchisees.
3. The "legacy asset" philosophy is the cornerstone of franchisee success. (Brett Heffes) – Treating stores as permanent community assets rather than short-term profit tools changes the operating mindset, and is the fundamental reason for the high renewal rate (99%).
4. The "99% renewal rate" is the most important metric for measuring company health and franchisee relationships. (Brett Heffes) – Over the past decade, the company's renewal rate has ranged from 97.4% to 100%, but has consistently remained at extremely high levels, proving the system's effectiveness.
5. Divesting the non-core leasing business was the most important strategic decision in the past 20 years. (Brett Heffes) – This decision freed up 30-40% of management's time and allowed the company to fully focus on its core second-hand business, which has delivered returns far exceeding expectations.
6. Capital allocation "discipline": do not buy overpriced stock, do not buy back just for the sake of buybacks. (Brett Heffes) – In 2023, the company did not buy back shares due to valuation concerns, instead issuing a special dividend, reflecting the principle of "not wasting shareholder funds."
7. The biggest competitor is not other second-hand platforms, but "landfills." (Brett Heffes) – This is a huge market that has not yet been fully addressed, and it is the core driver of industry growth.
8. The secret to franchisee success: follow the operations manual, and maintain "continuous purchasing" and "necessary marketing investment." (Brett Heffes) – The most common reasons for failure are "restricting purchasing" and "insufficient marketing investment."