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.