Winmark Corporation

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Winmark Corporation

4200 Dahlberg Drive, Suite 100
Minneapolis, Minnesota 55422-4837
U.S.A.
Telephone: (763) 520-8500
Toll Free: (800) 567-6600
Fax: (763) 520-8410
Web site: http://www.winmarkcorporation.com

Public Company
Incorporated: 1988 as Play It Again Sports Franchise Corp.
Employees: 122
Sales: $26.6 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: WINA
NAIC: 339992 Musical Instrument Manufacturing; 423910 Sporting and Recreational Goods and Supplies Merchant Wholesalers; 448130 Children's and Infants' Clothing Stores

Winmark Corporation pioneered what the company calls the "ultra-high-value" retailing niche. High quality used products are sold alongside new goods in a traditional retail store format. The rapidly growing company began with Play It Again Sports, which is ranked among the largest sporting-goods chains in the United States, with 410 stores in 2005. Its other three franchised businesses are Once Upon A Child (with 208 stores), Plato's Closet (with 133 stores), and Music Go Round (with 40 stores). All of these operations buy, sell, trade, and consign used and new merchandise. In addition, Winmark also offers business services, including equipment leasing, under the name Winmark Business Solutions.

Origins

Martha Morris was inspired to develop the Play It Again Sports concept in 1983 when she had trouble reselling a nearly new $200 backpack. She borrowed $15,000 from a friend's parents, and the two women started a used sporting equipment store in a vacated tombstone shop near a Minneapolis cemetery. Morris bought out her friend within a few months. Boosted by local television coverage, she sold about $120,000 of used equipment during her first year of business. Initially she sold everything on consignment, but she later began buying used equipment outright and selling new goods, such as sales representative samples, last year's models, and retailers' out-of-season equipment.

Financial success and customer feedback told Morris the idea could work elsewhere, so in mid-1988 she went to a franchise development consulting firm for help. K. Jeffrey Dahlberg and Ronald G. Olson, the owners of Franchise Business Systems, Inc. (FBS), had their doubts at first about the potential for a used sporting goods chain. In a 1994 Fortune magazine article Olson said, "Her store looked like a garage sale with hours." Nevertheless, the numbers showed them she was also pulling in a lot of business, so FBS took her on as a client.

The Minneapolis Star Tribune for March 8, 1992, Dick Youngblood wrote, "Her instincts were bull's-eye accurate. Despite limited capital, the business grew in 18 months to 19 franchise operations in six states, taking 1989 revenues to more than $800,000, which included sales at the two stores Morris owned then plus the franchise and royalty fees. Sales of the franchised stores alone totaled $1.3 million." Dahlberg and Olson used their combined expertise to polish the entrepreneurial nugget into a gemstone.

Dahlberg acquired his franchising know-how in his family-run hearing-aid business. He began developing the Miracle Ear Centers network when he was named president of Dahlberg, Inc. in 1983. However, the combination of uneven earnings and franchise startup costs of $10 to $15 million caused friction with his father and a power struggle with a group of California investment firms that held 20 percent of the company stock. In 1986, only a few months after being named CEO of Dahlberg, Inc., he left the company.

A friend introduced Dahlberg to Olson, who had 20 years of retail experience with companies such as Dayton Hudson Corporation and on his own. The two men formed FBS in 1986 as a franchise development, marketing, and investment firm. Among the franchise systems they helped build were a 250-store eye-care chain and a 100-store dry-cleaning chain. Olson was left to run the day-to-day business of the consulting firm, while Dahlberg reconciled with his father and returned to lead the hearing-aid business in 1988.

Play It Again Sports in 1990s

In 1990, Dahlberg and Olson bought the franchising operation of Play It Again Sports for more than $1 million plus five years of royalty payments. Dahlberg became chairman and Olson served as president and CEO of the company. The next year, Morris decided to sell them her three retail stores as well, but she signed on as a consultant. By the end of 1991, 134 Play It Again Sports franchise stores were open in 41 states and Canada.

In January 1992, Dahlberg and Olson purchased Sports Traders, Inc., an independent wholesaler owned by Jim Van Buskirk, an early owner of Play It Again Sports. Van Buskirk acquired a 50 percent interest in the first Morris store in 1986, but the next year he left to develop his own Play It Again Sports stores. The wholesale business he started supplied both his and Morris's stores with new goods to supplement the selection of used sporting equipment purchased from the public. As part of the purchase agreement, Van Buskirk's Play It Again Sports stores continued to operate separately from the growing franchise system.

Play It Again Sports franchises were being sold at a rapid pace. Dahlberg and Olson were able to draw from a pool of middle managers displaced by corporate downsizing. The men believed the Play It Again Sports concept could be translated into other retail areas and began acquiring successfully established businesses in the used goods market. In November 1992, Dahlberg and Olson purchased franchising and royalty rights from Once Upon A Child, Inc., a Columbus, Ohio-based, 22-store chain selling children's clothing, furniture, and toys. The chain had been started by local retailers Dennis and Lynn Blum in 1985.

Dahlberg resigned as president and CEO of Dahlberg, Inc. at the end of 1992 in order to devote himself full time to the expanding Play It Again Sports business. Dahlberg, Inc., its sales and earnings boosted by the franchise system Dahlberg had built, was sold to Bausch & Lomb in 1993 for $138 million.

A Name Change in 1993

In February 1993, Olson and Dahlberg opened the first corporate-owned Once Upon A Child store. All of their 16 Twin Cities franchises were sold before mid-year. Also in 1993, the company purchased assets of Hi Tech Consignments, a musical instrument and audio equipment retailer (renamed Music Go Round) and Computer Renaissance, Inc., a retailer of close-out and used computers. In recognition of the changes, Play It Again Sports Franchise Corp. was renamed Grow Biz International, Inc.

In August 1993, an initial public offering (IPO) was announced: 1.6 million common shares at $10 per share. The Grow Biz stock price jumped to $15 per share during the first trading day. The company raised about $16.7 million from the IPO. Revenues for 1993 increased 89 percent over the previous year to $51.8 million. By the end of the year, 490 stores were open in the United States and Canada; eight of those stores were owned by the corporation. An additional 282 franchises had been awarded for future opening.

In the Twin Cities Business Monthly for December 1993, Gillian Judge wrote, "The company's recent rapid growth hasn't been without repercussions, and some of the newest franchisees of Once Upon A Child shops grumble that the system has some kinks to work out before it runs as well as Play It Again Sports." In order to bolster franchise support Grow Biz began to decentralize operations. During 1994, the company began individualizing concept support and leadership.

Grow Biz's 1994 revenues grew to $83.6 million; net income was $1.4 million, a 300 percent increase over the previous year. The first Canadian Once Upon A Child store was among the record 243 Grow Biz stores opened in 1994. The company added a fifth business concept that year, compact disc stores. Grow Biz purchased assets, franchising, and royalty rights of CDX Audio Development, Inc., of Green Bay, Wisconsin, which operated 43 CD Exchange stores.

In 1994, the company topped both Fortune and Inc. magazines' lists of the fastest-growing American public companies. According to Fortune, Grow Biz had experienced an annual growth rate of 285 percent in terms of total revenues over the past five years. In an Investor's Business Daily article by Claire Mencke, Olson pointed out that initially the company's rapid growth was unexpected. "But it happened that we brought together a lot of trends: value pricing starting with the used product, the trend in recycling, and the availability of a lot of strip-shopping center real estate."

Despite the acclaim, 1994 also had its bleaker moments. Grow Biz stock price fell by 15.7 percent in October when lower-than-expected third quarter earnings were announced. According to an October 22, 1994 Star Tribune article, the earnings' setback was caused by a reduction in the projected number of store openings for the year, due to a tight strip-mall real estate market and losses related to foreign investments.

Company Perspectives:

Winmark Corporation develops, franchises and operates value oriented retail concepts for stores that buy, sell, trade and consign quality used and new merchandise. Each franchise emphasizes the ultimate in consumer value by offering high quality used merchandise at substantial savings, and by purchasing or accepting as trade customers' used goods that have been outgrown or are no longer used. New merchandise is offered to supplement the selection of used goods.

The company had begun to franchise Play It Again Sports stores internationally in 1991. In 1993, Grow Biz entered into joint venture agreements to franchise stores in Europe and Mexico. However toward year-end 1994, Grow Biz withdrew from the Mexican market, closing both of its corporate-owned stores. The company also suffered losses in its corporate-owned German venture, but the franchised stores there continued to operate.

In Corporate Report Minnesota for April 1995, Lee Schafer noted that the Play It Again Sports franchises were moneymakers for their owners, a situation that was atypical of the franchise environment at the time. However, Schafer pointed out that analysts had some reservations about the other concepts. The computer stores faced uncertainty related to rapidly changing technology, the strength of franchisees among the kids clothes and toys concept was being questioned, and the disc businesses faced stiff competition from new disc sellers. Olson disputed this and said in the same article that Grow Biz was "concentrating on becoming operationally strong" in all five concept areas.

Grow Biz gave its franchisees support and assistance in the following areas: advertising and marketing, centralized buying and warehouse services, point-of-sale computerized information systems, management training, and store opening assistance. It also provided periodic field support visits. The franchisees were generally required to comply with guidelines regarding store design, the use of television advertising focusing on the buy-sell concept, and standardized merchandise purchasing processes. An initial franchise fee cost $20,000. Franchisees also paid an annual royalty of 3 to 5 percent of gross revenues.

Grow Biz more than doubled the size of its distribution facilities in 1995 and consolidated operations at its headquarters. Revenues for 1995 topped $100 million, while net income climbed 47 percent to $2 million. Royalty revenue jumped 51 percent to $11.6 million. By year-end 1995, a total of 1,311 franchises had been awarded: 965 stores were open, including 57 stores in Canada, eight in Europe, and one in Australia.

In early 1995, all the Grow Biz concepts except Music Go Round were ranked first in their categories in Entrepreneur magazine's Annual Franchise 500. Music Go Round, the smallest of the five Grow Biz concepts with 11 U.S. stores in operation, generated $4 million in revenues in 1995. Customers ranged from parents seeking a place to buy or sell musical instruments for their children to professional musicians upgrading their equipment.

Among Computer Renaissance's best customers were first-time computer buyers and sellers and small business owners. The company also purchased used computers from corporations upgrading their systems and from liquidators. Only about 20 percent of store inventory was new. Unlike the other Grow Biz concepts, which typically purchased used goods ready for resale, the corporation refurbished used computers and provided franchise operations with technical assistance. Revenues for the 64 U.S. and Canadian stores in operation in 1995 were $23 million.

Compact disc industry sales grew by 33.6 percent in 1994, according to company figures. With Disc Go Round, Grow Biz was positioning itself to capitalize on the strength of the relatively new industry plus the growing CD-ROM market. Disc Go Round's 1995 revenues were $17 million, and all of its 99 stores in operation were in the United States and Canada. The typical franchisee and customer were younger than those of the other Grow Biz concepts.

Once Upon A Child stores targeted parents with children under 12 years of age. "Gently-used" items, which were sold for one-third to one-half of the new retail price, made up about 80 percent of the Once Upon A Child product mix in 1995. The 164 stores open that year generated $37 million in sales. In contrast, Play It Again Sports had 674 stores in operation in 1995 and generated $255 million in revenues.

In 1998, a new franchise concept, ReTool, was launched. ReTool focused on buying and reselling used and reconditioned tools. In much the same manner as the other Grow Biz franchises, ReTool aimed at the typical consumer looking to sell tools he no longer needed and buy tools he did need at a discount.

Olson said a May 1996 article by Susan Reda in Stores that Grow Biz "raised the bar in terms of consumers' expectations" of used goods. He went on to say, "There's no longer a stigma attached to buying used items."

Changes in the 21st Century

Grow Biz had seen a growth in the number of stores in the 1990s, but that growth was apparently too fast. In 2000, the company showed a loss of $350,700. The 2000s saw big changes at the company. John Morgan acquired control of Grow Biz in 2000. A former partner in Winthrop Leasing, Morgan had sold his company and retired in 1999. However, retirement did not suit him and Morgan looked around for new business opportunities. As the chief executive officer, Morgan brought in a new management team to run the company. Jeffrey Dahlberg and Ron Olson, while not involved in operations, each continued to own 20 percent of the company's stock, while Morgan owned another 20 percent. In 2001, Grow Biz was renamed Winmark Corporation.

Among the changes instituted by Morgan to revive the company was to close down the ailing Disc Go Round and Computer Renaissance franchises in 2000. The ReTool franchise was shut down in late 2001. The concept had never worked out as well as expected. As Morgan told John Hoogesteger in CityBusiness for December 7, 2001, "People don't normally sell old tools. Even tools they rarely use they keep around in case they need them at some point." In the three years the franchise was in operation, only 17 stores had been opened. Weaker stores in the other franchises were also shut down during this period of reorganization. In 2002, Winmark began purchasing an interest in Archiver's, a photography service provider specializing in preserving old photographs. By early 2004, Winmark owned nearly 20 percent of the company's stock.

Key Dates:

1988:: The company is incorporated as Play it Again Sports Franchise Corp.
1992:: Once Upon A Child, Inc. is acquired.
1993:: The company goes public and changes its name to Grow Biz International, Inc.
2001:: The company's name is changed to Winmark Corporation.
2003:: Winmark Business Solutions is launched.

Winmark's new Plato's Closet franchise, retailing used clothing for the teenage market, was a success. Developed by the same couple who had come up with Once Upon A Child, Dennis and Lynn Blum, the franchise name was suggested by their son, who had been studying the Greek philosopher in school. Focusing on "gently-used" trendy clothing not yet out of style in the rapidly changing teen market, each Plato's Closet store was between 2,500 to 3,200 square feet in size and contained some 98 percent used clothing and 2 percent new clothing. Most prices were some 70 percent below the new merchandise price. By 2005, there were over 130 Plato's Closet stores in operation.

The financial picture for Winmark improved dramatically in the first five years of the 21st century. With the closing of stores that were not performing, the company saw a profit of $3.2 million in 2001. This trend continued in the following years: $3.8 million profit in 2002, $4 million in 2003, and almost $4.1 million in 2004. In the first quarter of 2005, Winmark posted a net income of nearly $700,000. According to Neal St. Anthony in the Star Tribune for April 13, 2004, since Morgan took over the company, Winmark's "performance has turned around and the return on equity has averaged more than 30 percent annually." By March 2005, Winmark operated a total of 791 stores in North America.

In 2003, Winmark expanded its activities to become a service supplier to franchise owners and small business in general with the launch of Winmark Business Solutions (WBS), a free service that offered small business owners negotiated discount pricing from such vendors as accountants, office supply retailers, printers, and Web designers. WBS also leased equipment to small businesses. Under this arrangement, a business owner could choose the type of equipment needed and a particular vendor, and WBS would purchase that item and lease it to him. The lease deal allowed the business owner to free his cash for other purposes. The business concept was similar to that followed by Morgan's old company, Winthrop Leasing. While the leasing business was still a small part of Winmark's financial picture, company officers were optimistic about its future as a complement to the firm's franchising operations in the used goods market. While Winmark's success could propel more franchisers to develop competing national used product chains, the company was banking on its growing name recognition to help it continue to draw consumers to buy and sell merchandise and on potential franchisees to choose their concepts over other options.