Clothing and gear manufacturer Patagonia has always relished the challenge of a hard climb. Since its founding in 1975 by legendary outdoorsman and environmentalist Yvon Chouinard, the company has pursued a dual mission: to make a profit even as it “uses business to inspire solutions to the environmental crisis,” says Rose Marcario, the company’s chief operating officer and CFO.
A corporate-finance veteran who has held top positions at LA Gear, National Rectifier, and General Magic, Marcario, 46, says she initially entertained “a healthy skepticism” about Patagonia’s determination to succeed on its own terms. “I didn’t think it was possible to blend a social and environmental mission with profit targets, but now I am a total convert,” she says.
And why not? Privately held Patagonia (Chouinard refuses to take the company public) has been profitable for most of its existence, generating about $400 million in annual revenues. Indeed, the contrarian company has even managed to defy the recent economic downturn: Patagonia recorded its best two years in 2008 and 2009, in terms of revenue and net income, and is on firmer financial ground than ever.
Still, like finance chiefs — and COOs — of more-conventional companies, Marcario had tough choices to make during the recession, as she told CFO in a recent interview.
How do you reconcile being a COO who has to spend to develop products and a CFO who has to rein in spending?
I hate CFOs who always say no. I think the best CFOs are operationally oriented and know how to balance a responsible spending model with a strategic plan. You have to take risks and work hard at creating an environment of transparency. I’ve seen in my own career that it’s a mistake when finance chiefs are too proprietary about information — when they have an old-school paradigm where knowledge equals power and it’s best to hoard it. That’s never good for a company.
Focusing on your CFO role, what’s been most challenging in steering Patagonia through the recent crisis?
The toughest forward-looking decision was related to our inventory purchasing plan. I was looking very hard at style proliferation — Patagonia is known for being innovative and introducing a lot of new products every season. I was trying to trim back a little and balance our desire to offer new styles with our need to manage inventory based on weakening preseason orders.
Also, we decided to freeze hiring and salaries, and we stopped our 401(k) discretionary match. Everyone at the company went into belt-tightening mode, because it was a very uncertain time. Fortunately, when 2009 came to an end and we did a full assessment, we saw that we had fared well, and we gave back what we asked the company to sacrifice, by retroactively reinstating all the employee raises for the year, reinstating the 401(k) matching contributions, and lifting the hiring freeze.
What about external pressures, such as access to credit?
Our main operating line came up for renewal right in the middle of the financial crisis. I could have put off the renegotiation because we had a strong balance sheet, but I decided to just go for it, since I was operating from a position of strength — we were still thriving and growing. In the end, the crisis made our banking relationships stronger and more flexible because lenders viewed us as a good partner (see “Take Control of Your Bankers“). At a time when many banks were slashing credit lines, we nearly doubled our capacity and got better terms. I wouldn’t have believed it if I hadn’t lived through it.
This year you took the unusual step of asking managers to help out, financially, with a relief effort for the oil spill in the Gulf of Mexico. How did that play out?
We didn’t have it in our budget to fund the Gulf programs we wanted to launch, and we didn’t want to take away money from the environmental giving that we normally do, because those organizations depend on us. So I went to all my colleagues and asked them how much of their SG&A budgets they were willing to give up. And they found money to fund our efforts.
As a result, we made a $100,000 donation to grassroots environmental organizations, and matched any employee contribution 2-to-1. Then we made a commitment to send 10 employee volunteers per week to the region to help with cleanup efforts, and pay them their full salaries while they were away. In addition, because our dependence on oil is what got us here in the first place, we are looking at ways to provide incentives to employees who choose more-fuel-efficient ways to get to work.
How would a federal carbon emissions cap-and-trade program affect Patagonia?
We’re a business that generates carbon, so there would be a cost. But we have been working to reduce our carbon footprint, so I think we’re ahead of the game. You know, I don’t really remember the carbon issue ever being elevated [to the CFO level] in my previous jobs. What’s interesting to me is that in business, you’ve got a limited amount of resources, time, and people, so you have to focus on the things you can accomplish. And it never seemed possible that you could do both of these big things — caring about the environment and making a product — well. But it works.
No matter how environmentally conscious Patagonia might be, it can’t operate in a vacuum. How do you balance your emphasis on social responsibility with the views of the companies you do business with?
We’ve used our supply chain to further our mission of helping other companies understand environmental issues. For example, Wal-Mart came to Yvon [Chouinard] to find out about sourcing organic cotton. I would say that’s pretty influential for a little company.
But M&A poses larger issues. While we have done small acquisitions over the years, our business model lends itself to organic growth because brand presentation and values are so important to our founders. We’re not closed to acquisitions, but the target company would really have to be in sync with our brand and vision.
What metrics do you monitor most carefully?
Some of the metrics we watch may not be what other companies focus on, certainly. For example, we look at things like the recycled content of our fabrics, corporate social responsibility metrics with regard to our factories, and the percentage of our product line that is recycled through our “Common Threads” program [an in-store customer program]. We also measure the results of our environmental grants and our donations. And I track the normal financial retail metrics, like SKU productivity, working capital, and profitability for all of our sales channels.
Do you prepare integrated financial reports that combine social responsibility data with standard financial facts and figures?
No, but we publish a booklet of environmental initiatives that is available to the public and describes the company’s supply-chain and sourcing strategies. Since we are private and don’t release financial statements, the booklet is a way of communicating our initiatives to customers and suppliers.
Does being a private company make it easier for Patagonia to continue its dual mission of making money and helping the environment?
Having lived on both sides, there’s no question that private companies have a tremendous amount of flexibility compared with the external pressures that public companies must deal with [regarding earnings goals]. Also, being family owned provides a great deal of consistency in terms of the corporate vision for Patagonia.