This year, both Staples Inc., the world's largest office-products company, and its CFO, John Mahoney, celebrate milestones. The company, which started in a Boston suburb with one store, turns 20 years old and now counts more than 1,780 stores and serves customers in 21 countries. Its sales hit $14.4 billion in 2004. Meanwhile, its finance chief, a former Ernst & Young partner, celebrates 10 years in his position. To mark the occasion, the 54-year-old Mahoney has taken on added responsibilities as vice chairman, including global strategic planning and business development. As an avid runner, though, he knows that going the distance means being smart about pace.
Can you put this past year in perspective?
Whatever we announce [on February 28] for the fourth quarter, 2005 will have been a great year for us. In the early years we were growing rapidly, trying to get to every market first, trying to beat our competitors in every way we could. In the past few years, though, we've had the opportunity to deliver better performance in every area from store growth to service to our information-systems capabilities. That, in turn, has driven our returns and cash flows up. In fact, in Q4 2004, we earned returns above our RONA threshold target of 11.7 percent for the first time — and that is the measure most highly correlated with increased share prices.
With $1.3 billion in cash at your disposal, how do you balance the competing demands of bondholders and shareholders?
You always want to steer down a path that gives you the flexibility to borrow money when you need it and maximizes value for your equity shareholders. Making the trade-off is difficult, but one of the key things about generating a lot of cash is that it creates value and demonstrates that you can use the money wisely. And in '05, we accelerated our capital spend a little bit as our returns improved, because we believe investors want us to put our money where we can get a good return.
Are you content with your BBB rating?
That investment grade is about where we want to be, given that we have such a large lease portfolio with our stores. It's hard to get much higher than that, because the rating agencies tend to give credit for assets that you own. And given the pools of capital we have access to and the cost [involved in moving up], that triple-B area seems to be kind of the sweet spot.... I wouldn't do anything that hurt our ability to grow the business to get to an A rating.
Today about 75 percent of your customers are small businesses. How has that changed in the past two decades?
Our first store was located in an area with about 15,000 small businesses in a five-mile radius. And our sole reason for being was that we recognized that those small businesses were not getting good deals on office products locally. [Admittedly,] we kind of drifted away [from that original mission] in the late 1990s. But that small-business customer is very loyal. And if you look at trends in the economy, small businesses are driving the job gains.
What indicators do you look at to gauge small-business buying potential?
Small-business formation is a leading indicator for us, but it's hard to get the data in real time. Instead, we look at a mix between GDP and industrial production to predict where an economy is headed.
As the main supplier to so many small businesses, how do you characterize your stance with your own suppliers?
We want to be a good customer, but not a great customer. A great customer makes suppliers rich and gets taken advantage of. A good customer holds up its end of the bargain, pushes really hard, but remains fair.
One of your main competitors, Office Max, is in the midst of a major restructuring. Does that spell opportunity for you?
They're closing poor-performing stores, so it doesn't present an opportunity to enter a whole new market like we did in Chicago last year. Overall, our growth plans haven't changed. We expect to open about 100 stores in North America this year and about 15 in Europe.
As vice chairman, you have to push the global agenda. What challenges do you face bringing the Staples business model overseas?
Take Europe. People there don't shop the same way they do here. Getting customers into the habit of stopping on their way home from work to get the things they need for the next day has come just a little slower. So we haven't invested aggressively there, because we felt we had a lot to learn. Instead, we hope that if growth slows in the United States a few years from now, we will accelerate our growth in Europe, because our knowledge of how to operate effectively there will be more complete.
So you're just pacing yourself?
Growth in whatever industry you're in means either taking market share from somebody else or expanding your geography. We think expanding our geography is a good way to grow, but it's not exactly the same as growing here in the U.S. We opened only about a dozen stores in Europe last year from a base of 275 stores. In the U.S., when we had 300 stores we were probably opening 65, 70 stores a year. Maybe we're biased by the fact that we think there is still good growth available in the States.
As the largest office supplier in the country, do you face unique financial pressures in order to remain number one?
Continuing to improve our profitability and staying ahead in a business where you have to earn your customer every day always presents a challenge. Part of my job is to keep people focused on our objectives and to set targets that cause them to extend themselves. That's key to preventing complacency.