Candid Winmark Leader John Morgan Has No Filter
Looking back, John Morgan calls it the “worst six months of my business career.” In March 2000, he stepped into the CEO role at Grow Biz, best known for its franchised lineup of Play It Again Sports stores. Brought in at the invitation of Jeff Dahlberg, the departing CEO, and Sheldon Fleck, a 10 percent investor in the company, Morgan found a mess.
“They needed me. Badly,” he recalls. “They thought everyone was telling the truth [about the state of the business.] They didn’t know the truth.”
His first task was to stop the bleeding. At the time, Grow Biz, renamed Winmark Corporation in 2001, offered six different franchise concepts. Quickly, Morgan sold one, Computer Renaissance, a seller of used computers, and dissolved another, Retool, a group of stores selling used tools. He kept Play It Again Sports, Plato’s Closet, Once Upon A Child, and Music Go Round, and most recently added Style Encore. In 2013, Winmark’s store count will top 1,000 franchised stores (none are company-owned), while retail sales of its franchisees will be more than $900 million.
When he joined in early 2000, the market capitalization of Grow Biz, which went public in August 1993, was $30.9 million. At a recent price of about $73 per share, the market cap of Winmark today is just under $370 million, a 12-fold increase since Morgan took over. With just over 100 employees, Winmark’s market cap per employee is $3.5 million, a top-of-class performance in any industry.
Today, Morgan owns a little more than 34 percent of Winmark, worth about $125 million. He points out that he has received only one stock option grant during his 13-year run as a CEO—an initial grant of 600,000 options at $5. The balance of his 1.7 million share holding has been purchased on the open market.
Morgan, 72, stands out in the Twin Cities business community because he’s had two big breakthroughs. In 1982, he and two partners, Kirk MacKenzie and Jack Norqual, founded Winthrop Resources, an equipment-leasing business, which was sold to TCF Financial Corporation in 1997 for $340 million in TCF stock. In the years after the deal, TCF stock doubled, split, and doubled again.
Says Morgan, “The single best business decision of my career was to take all stock. I had looked at that stock over and over again, and said it was undervalued [at the time of the deal.]” Given that Morgan and his two partners each owned about 15 percent of Winthrop, he was “rich beyond my wildest dreams.”
Morgan also led Winmark into the equipment-leasing business, using the cash flow from the franchise business. Its lease portfolio stood at about $36 million as of December 31, 2012. By contrast, Winthrop Resources had a portfolio of approximately $348 million in 1997 at the time of the TCF deal.
Growing up in a modest neighborhood in Omaha, Morgan is known for being smart and straightforward. One long-time Winmark investor, who asks not to be named, says that Morgan is known for saying whatever is on his mind. Morgan doesn’t dispute this. In a May interview at Winmark’s offices, I asked him what he’d title a book about his business career. He answered without hesitation: “No Filter.” Sometimes “my mouth goes to war before my mind thinks about it,” he explained.
What was the toughest part about fixing Grow Biz?
The franchisees. Early on, a group of them called me down to Chicago. We met in a room at O’Hare. I went alone. They had their lawyer there. I listened to them, but then told them how it would be. If any of them had a problem with that, they should take down their sign and get out. It wasn’t going to be groupthink. It was going to be my way or the highway.
There was no need for some humble pie, a mea culpa?
I didn’t create the problem. Plus, there was a different opinion for every guy in the room. But only one guy—me—could figure it out. Was I sorry for them? Absolutely. I had empathy for them. I came back to the office and said, “It’s just a job for you here.” For our franchisees, it’s their marriage, their kids, and in some cases, threats of suicide. It was a disaster.
What had gone wrong?
They had sold franchises to anyone who could come up with the money. If there’s one thing that we’ve changed at this company, it’s not just if you have the money. We really screen the franchisees. We make them work hard to find the right real estate. And we don’t give them a second store until they’ve proven they can run the first.
How big do you want to be?
There is no wish list. We want to build a good business at a reasonable rate for everyone: the shareholders, the management and the employees, and the franchisees.
Who are the customers of your system’s stores?
Lower-middle to higher-middle income range. Families that will buy used goods. People who go to garage sales and are looking for really good bargains. A lot of people start off shopping our stores after they’ve sold goods to us.
Once a stock rises, as Winmark’s has, the typical pattern is for the CEO to sell a bunch of shares in the market. You’ve turned that model upside down and have bought more than 1 million shares in the open market in the last 13 years
I have the cash. If I think it’s a good investment, I buy it. People ask me what my exit strategy [is]. I don’t need an exit strategy, as I don’t need the cash.
But surely diversification is important.
I’m a Warren Buffet man on this issue. Diversification is overrated. If you find a good idea, pile in. Look at the track record. We can grow organically and don’t have to get involved with foolish diversification ideas.
Is your share-buying a slow way to take the company private?
I want the company to be public. To motivate the employees, it has to be a public company. Stock options are the best way for them to grow their net worth.
The Winmark March 2013 proxy disclosed that you and your top three managers all earned the exact same salary ($267,250) and exact same bonus ($267,250) for fiscal 2012. Why the same?
You don’t do things just because you can. You do things because you have a reason to. And my reason to do this is that this motivates them. It works.
Raised on the north side of Omaha, Morgan came from a blue-collar family. His father was a truck driver and his mother a bank teller and homemaker. After attending the University of Nebraska at Omaha, he started at IBM in Des Moines, selling for the office products division. His income for 1965 was $19,900. “When I showed my W-2 to my father, he couldn’t believe it,” remembers Morgan. Since the most his father had ever made in a single year was $12,000, Morgan’s father was convinced there was a terrible error in his son’s W-2.
I was sort of a dead-end kid. If you really think about it, what were my choices to get ahead in life? One of them was to make a lot of money and be successful. I got tossed into the business world, and the measure is money. I was motivated by that.
What was the important thing that IBM taught you?
IBM taught me how to say “Oh, really?” to a customer instead of “Oh, shit.” They taught me how to wear the white shirt, the rep tie, and the shoes with a thousand eyes. They really polished me.
As I went along … one of my talents is that I see the world as it is. Plus, as a salesman, I learned early on to take an interest in my customer’s business. Customers really appreciated that, which made me a better businessman.
Did you have that measure of self-awareness back then?
When I was 25, I was trying to start businesses in my mind. How did they work? What is actually behind this business? First, it was, “What do they do?” Then as I got more sophisticated, it was “How they do really make money?” To break things down in that fashion is the key to good investing.
The Rise of Winthrop Resources
After IBM, Morgan worked for Memorex (twice), then a failed startup, and from 1976 to 1981, Minnesota-based Dataserv. Dataserv, which primarily marketed used equipment, was one of the pioneers in the world of computer finance. Yet, recalls Morgan: “I wanted out of there. I didn’t want to travel as much.”
Morgan “was only lukewarm” about starting another company, but in 1982 he finally decided to take the plunge with Winthrop Resources. Capitalized with just $105,000 (a modest $35,000 from each founding partner) Winthrop secured a $2 million line of credit from U.S. Bank—with no personal guarantees. “We were shocked, but they had that much faith in what we were doing,” says Morgan. They even made money in their first year: $390,000 in 1982. (Morgan brought 20-year-old financial statements to the interview to prove it.) His decision to sell to TCF in 1997, as noted, made him even more money.
Why did you sell?
Bill Cooper [the CEO of TCF] came to us. We met in a private room at the Minneapolis Club. We told him our story. It was a way to make money that a bank doesn’t know how to do. And they saw that they could make even more money because their cost of money was so much lower than ours. If you believed what we were saying about our portfolio and our future, it was a no-brainer for them.
What was it like negotiating with Cooper?
He’s a straight talker. If he wants to get something done, he gets it done.
You joined the TCF board and became its largest shareholder.
At the very beginning, I thought I would stay with the bank. I thought I would get along and be a happy camper, and learn the banking business. It was unrealistic.
Poker and Canterbury Park
Beyond his passion for family (15 grandchildren) and for Winmark, Morgan has staked his claim as a well-known poker player. “I’m not a very good player,” he says, “but I have no fear.” He plays in tournaments almost every week, and most famously was in a World Series of Poker event in July 2012. The pay-to-play for the 48 players was a cool $1 million apiece, with the winner taking home more than $18 million. No personal checks, Morgan remembers; they only accepted a cashier’s check. During the event, Morgan faced down a Russian billionaire with a bold all-in move in a game of Texas hold’em. His opponent folded and then turned over a hand of four eights—a winning hand almost any time, but Morgan had won the round. The story of that showdown quickly went viral, with one poker pro calling it the “craziest hand I’ve ever seen.”
Inspired by his poker playing, as well as his interest in the poker industry, Morgan began accumulating shares of Canterbury Park Holdings about three years ago. He now owns 9.4 percent of Canterbury (NASDAQ: CPHC), the race track and card casino in Shakopee. He joined its board of directors in January.
Why did you invest in Canterbury?
There are a thousand reasons.
I can’t use 1,000. Give me three.
First, Mystic Lake Casino is a partner. A fabulous deal for Mystic Lake. A fabulous deal for Canterbury. It’s a deal that should have been done, and it did get done. Second, I do like horse races. I grew up going to the track as a kid. Three, I like to play poker and I like the Sampsons [the top management at Canterbury] a lot.
Can you speak more to the investment thesis?
It comes from [Benjamin] Graham and [David] Dodd [influential investment gurus from the 1930s]. A deal should have a margin of safety. It’s one of their investment criteria. I think Canterbury has a huge margin of safety. Because I still think the real estate value there is higher than the market cap. I’m a value investor.
Philanthropy and the Transformation Project
Asked if he had a favorite quote, Morgan cited a line from Dickens’ A Tale of Two Cities: “It is a far, far better thing that I do, than I have ever done; it is a far, far better rest that I go to than I have ever known.” Morgan explains: “Most of us are a bag of good news and bad news. There are a ton of things I’ve done wrong. But in the end, what have you done that has really contributed? You try to leave your mark.”
Morgan’s philanthropic efforts include serving on various boards, including for Girls Inc., where he became close friends with Susie Buffett, daughter of investment maven Warren Buffett, often known as “the Oracle of Omaha.” In the course of his other service he has also gotten to know Buffett himself, as well as other members of the family.
A story in wide circulation recounts the live auction at a Girls Inc. benefit in late 1999. In a tribute to both Buffet and the nonprofit, Morgan bought Warren Buffet’s wallet, with a single stock tip inside, for $210,000.
He is also the sole funder of the Transformation Project, which operates in Nebraska prisons.
What does the Transformation Project do?
Teach the life of Malcolm X to prisoners, almost 170 of them now.
The life of Malcolm X?
Yes. Because during his time in prison, he transformed himself into someone who took responsibility for himself. It’s so expensive to incarcerate people. We need to keep them out of jail, we need to try to get them to take some pride in themselves. If you don’t think it’s cost-effective to change them in just a little way, you’re crazy.
Why are you so interested in that group?
I grew up in that neighborhood. People make a mistake and pay for it all their lives. How do people change? I’m personally a transformation project. I had a huge alcohol problem. It came to a head 42 years ago. I know the exact date: January 22, 1971. If I didn’t stop drinking, I wouldn’t have done any of the stuff that I’m doing. The problems of personality that come with that, you live with all your life. It’s a very important part of my story. The question is: How do you change yourself?
At the end of our interview, I asked Morgan to respond to a handful of rapid-fire questions.
If you had to do one thing in business over again?
I don’t have a lot of regrets. While I’ve made a lot of mistakes, I think mistakes build on who you are and make you better.
When you interview someone, what’s your favorite question?
I ask them about their family. I want to get to know who they are. I’m not looking for a perfect childhood. I’m looking for people who overcame adversity.
Do you have a favorite business aphorism?
Profit is fiction, cash is fact.
Who’s the best businessman you ever worked with?
Warren Buffett. By far. He breaks things down to their most simple. He talks in a way you can understand.
If you were the governor, what’s the number-one thing you would do for Minnesota business?
End all the rancor and contentiousness. You know that I’m a Democrat. When I sit down with Democrats, they don’t trust me because I’m a businessman. When I sit down with Republicans, they don’t trust because I’m a Democrat.
When you think about your business legacy, what do you want folks to remember?
I want my shareholders and my employees to feel that somehow I enhanced their lives.
Why are you good at business?
Why is one good at chess? You’re trying to analyze how things are going to happen in advance. I’m good at strategy—the same kind of skill that serves one well in playing poker or chess. Somehow it’s in my DNA.
Sven A. Wehrwein is a Minneapolis freelance writer and corporate director with experience as an investment banker and CFO. His e-mail is email@example.com.