Interview with Michael Mardy
Interviewer: Andrew Zezas, SIOR
Following is the transcript of a CFO Studio interview between Andrew Zezas, host of CFO Studio and finance executive, Michael Mardy, Executive Vice President & Chief Financial Officer of TUMI Holdings, Inc..
Visit www.CFOstudio.com to read about this interview and to watch the entire on-camera interview.
Views on the Economy and Corporate Growth
Zezas: You’re watching CFO Studio and I’m your host Andrew Zezas. I have the pleasure of being joined today by Mr. Michael Mardy, Executive Vice President, Director, and Chief Financial Officer of TUMI Holdings. Mr. Mardy is a senior finance executive with 30+ years of experience in a number of different industries including professional services, consumer packaged goods, food processing and distribution, commercial real estate, and luxury retail. Mr. Mardy has an undergraduate degree from Princeton University, an MBA from Rutgers, is a New Jersey CPA, is a member of the AICPA, and FEI. He’s corporate director at Green Mountain Coffee Roasters, ModusLink Global Solutions and sits on the board of the Institute of Medicine and Public Health of New Jersey. TUMI Holdings, a publicly traded company, a designer, marketer, and trader of high end travel goods and fashion and business accessories. TUMI distributes its products in approximately 1800 points of distribution globally and operates 120 company stores in North America and Europe. TUMI is a high growth company that has grown at annual compound rate of 20 percent since 2002. TUMI has many wholesale customers in Asia, the Middle East, Europe, and Africa, and sells its products in prestigious retailers throughout North America. Today, Mr. Mardy is here today to share his views with us on the economy and corporate growth and I think you’ll enjoy this episode. Mike, it’s so nice to have you here on CFO Studio.
Mardy: Andy, it’s good to see you.
Zezas: So, let’s start off by talking what’s called the JOBS Act. One would say it’s really called the Investment Act. How important would you say the JOBS Act really is and what kind of impact will it have on the US Economy?
Mardy: It’s interesting when they passed legislation in Washington. They usually give the act a name to make it sound a lot better than it is. I think the JOBS Act primarily smoothes the path to initial public offerings for various companies. It makes it a little bit easier to access the capital markets. There are a lot of criticisms on the JOBS Act. The SEC Commissioner opposed the JOBS Act. She felt it would run the risk of loosening regulation too much and potentially defraud investors or be potential abuses of the JOBS Act. We’ve actually taken advantage on provisions of the JOBS Act at TUMI. It helped us smooth our path to an IPO. There are certain provisions that allow you to delay your opinion on internal controls and the like. I think the jury is out on the JOBS Act on whether or not it will create jobs. It’s made our access to the public markets a little bit easier. In that sense, it probably helped TUMI’s business and the economy that TUMI generally influences. So, it’s been a help to us.
Zezas: And, we’ve heard instances where the JOBS Act has been beneficial to companies as well, but let’s take a step back and talk about the greater economy and our United States government. What steps should we expect from the US government to kick the economy into gear?
Mardy: Well, the government has done a lot already. They passed a fiscal stimulus package, widely criticized by section of the political spectrum, but widely recognized by most economists as having done a terrific job bringing the economy back from the brink. I noticed distinct economic behavior when the stimulus package was passed. Frankly, my business started to improve almost immediately. Was money wasted, possibly. Could it have been done a little more efficiently, possibly. John Maynard Keynes would tell you that when you have an economic decline as precipitous as the one we had, you’re almost better off paying people to dig holes and fill them back up so the government can come in and basically stimulate demand where there is none. So, the stimulus was very strong element in improving, initially, the economic decline. And, the Fed has done a terrific job in flushing the economy with liquidity over the past three or four years whether it is QE1, QE2, or QE3. Ben Bernanke studied the Depression when he was a student and I think he learned pretty quickly that the way you deal with an economic decline like the one we had is to precisely do the opposite of what the Feds did in the 30s, flood the economy with cash. And, that has actually helped fuel economic growth. Although, some would say that it reached its limit. Really, in the absence of the political will to pass fiscal stimulus, the Feds program has been a huge help to the economy. What we really need in this country is the kind of economic stimulus, that the Eisenhower administration participated in after World War II, where they spent billions of dollars improving the country’s infrastructure.
Zezas: Highways, bridges, roads.
Mardy: Highways, bridges, roads, tunnels. I think we have 10,000 bridges in this country that are in near collapse or a very sad state of disrepair. You can’t export those jobs to China. You can’t outsource those jobs. I think that if the county could the political will together to essentially introduce a new infrastructure rebuilding program. You can do that really cheaply. I think that the Federal Government is borrowing money at extremely low rates, historically low rates. You can issue special development bonds to do that like the type of bonds that we issued in World War II to pay for the war. You can raise the gas tax a little bit to conserve energy. The government right now can borrow money so cheaply. There’s a good argument that says borrow it and build. Once the economy starts to recover from this decline that we experienced in the last 2 to 3 years, we’d be far better served to pull back spending at that point. So, the government has a big role to play in this.
Zezas: I would think so. At some point, we would have no choice to repair our infrastructure and doing that as a means of kicking off the economy sounds like it makes a lot of sense. Since you’re a Keynesian, we’ll talk about digging holes, let’s talk about quantitative easing.
Mardy: As I said, the Feds program of flushing the economy with liquidity, basically through printing money, has been an absolute boon to the economy. Some would argue that the boon is diminishing, but it’s done this without inflation. It’s done this without cost increases in various stuff that we use every day in our lives.
Zezas: How has it affected TUMI?
Mardy: We haven’t seen an increase in raw material prices. We haven’t really seen a big increase in energy prices. It’s actually helped our business, borrowing at historically low rates. One would argue that hey you should borrow at this point. Hey, we don’t need to borrow money. We’re paying off our debt, ironically. So, the real issue is, in the absence of demand, the Fed has done exactly what is should do.
Zezas: You haven’t seen any negative impact of quantitative easing, on the cost side specifically?
Mardy: The naysayers have been talking about cost inflation for about the past 4 to 5 years. What we really run the risk of in this country is deflation, which is worse. Now, I do see the beginnings of a housing boon in certain markets.
Zezas: Is it a boom?
Mardy: Good point. It’s a recovery. It’s a recovery in certain markets where it has gotten frothy.
Zezas: Places like Manhattan have been skyrocketing through this whole debacle.
Mardy: Very much. It is because the United States, besides all this criticism, still remains the best place in the world to invest money. So, if you’re a foreigner or you’re a very wealthy Arab Sheik or if you’re someone from Europe who wants to come to a tax haven, you come to the United States, you buy a multi-million dollar apartment in Manhattan and you help the economy at the same time.
Zezas: Everything hasn’t been rosy with the economy so tell me how the economy has adversely affected companies, specifically with their ability to secure bank financing.
Mardy: Well, if you’re a company that has pristine credit quality, you haven’t had any problem getting bank financing. In fact, I have my bankers pleading with me not to pay my loan. They want to loan me more money. Just like 4 or 5 years ago, we were in the midst of a financial crisis, they wanted to call their loan on me. Bankers are notoriously bi-polar on that. Frankly, it’s very easy to get financing if you’re a good credit. If you’re a bad credit, banks are still suffering the after effects of a financial crisis and because they’re required to have higher capital requirements, are very reticent to loan unless you have pristine credit qualities. So, in spite of all the Feds flushing the economy with all this money, some banks are reluctant to lend money. Now, community banks, on the other, are not so reluctant to lend money because those are the ones that aren’t too big to fail and those are the ones that need to employ their assets and to get them lent out. So, if you’re a small business and you need financing, a good place to look is a community bank.
Zezas: Yes, we’ve seen that ourselves.
Mardy: Bank of America, Wells Fargo, we bank with all the big banks and they’re great. But you need to have pristine credit quality.
Zezas: So, what about those companies that don’t have pristine credit quality?
Mardy: They struggle.
Zezas: They struggle.
Mardy: That’s one of the reasons why the economy isn’t as robust as you would like. It’s one of the reasons why companies are reluctant to, big companies and companies with good quality credit, invest cash. They’re holding their cash.
Zezas: Yea, let me ask you about that. There is a lot of cash in the system, but it’s sitting idle. $2 trillion is sitting in the coffers of corporations throughout the company and they’re not spending it. What’s going on?
Mardy: If you listen to the pundits in the business press, they’ll say it’s uncertainty. They’re uncertain about tax policy. They’re uncertain about the effects of ObamaCare. They’re uncertain about this and that. What they’re uncertain about is demand, they’re concerned about a lack of demand.
Zezas: For their products and services?
Mardy: For their products and services. They’re reluctant to spend. Although, what we’ve seen recently with the unemployment statistics, we’ve seen that change and we see that start to change dramatically. If you look at the past 16 months, we’ve had private sector job growth, which has been pretty robust, but we’ve had public sector declines to offset that to some degree. The last couple of months, notwithstanding, have continued public sector job declines. We’ve had a very robust recovery in the last couple of months with employment and that has the beginning of a nation recovery that will sustain itself and hopefully allow, 70% of our economy is consumer spending, people to spending again and get the economy moving.
Zezas: And get the economy moving forward.
Mardy: I think companies are starting to invest their extra cash because they’re becoming more and more confident that there is demand for their goods. Now, one of the things that happened for a brief period of time that happened a couple of years was that we had a rebound in export demand for our products. Europe, in a misguided way, has gone into austerity mode and that has caused our exports to decline as opposed to increase. So, there’s a lot of things that are going on in the economy that are good and I think that you’re going to those trillions of dollars on corporate balance sheets start to be invested.
Zezas: Well, we’re already seeing that happen. Switch gears because everybody’s talking about healthcare, ObamaCare, the PPACA, the Patient Protection Affordable Care Act. What’s your take and what do you think this is really going to do for business?
Mardy: Frankly, the biggest single problem that we face as it relates to deficit is the fact that burgeoning increase in healthcare costs.
Zezas: I’ve heard you say that PPACA is not a healthcare act. You said that it was a…
Mardy: It’s basically a health insurance reform act. It’s a little bit of a gimme to the insurance companies. If you take 30 or 40 million into the pool, the basic principle of insurance is that you insure more people. You spread the risks over more people. Many of the people who don’t have health insurance can’t afford it, but many people don’t have health insurance who are healthy don’t want to pay for it because it’s expensive. If you force 30 to 40 million people into the system, you institute some of the reforms that are embedded in the ObamaCare Act, things like cost study panel, not debt panels, but cost study panels and the like. I think the Congressional budget office has said, when that’s a bi-partisan office, it said it over the long term that healthcare costs should be moderated as a result of the healthcare act. From an insurance company perspective, they’re going to have 30 to 40 million people now paying premiums that would be very helpful for them. We’ve done some studies at my company and we’ve already supplied people with a good healthcare plan. We’re a retailer, so this is particularly a big issue with retailers. It’s probably going to cost us $200,000 to $300,000 in incremental costs and guys like me are going to pay more taxes because that is what the act is designed to do, to pay for things. Any of the costs that you incur in your lifetime, not 90, but maybe 60% of the costs you incur in your lifetime, you incur in the last 2 to 3 years of your life.
Zezas: For healthcare?
Mardy: For healthcare. So, you put your 90 year old mom in a hospital and suddenly they have her on life support. Really, there are questions as to what you do. You don’t want to pull the plug on mom, but at the same time you want her to have a quality of life. There’s a whole issue in the healthcare act about palliative care and how you deal with that. It’s not a death panel, but it’s how you deal with that. At some point, it doesn’t make any sense. I know if I’m on life support, I want someone to pull the damn plug. At a certain point, I don’t want to be kept alive just to lay in bed and develop bed sores.
Zezas: I’ll pull the plug for you Mike.
Mardy: Thank you Andy. I’m sure you would. Not right now. Give me a couple of years.
Zezas: Let me ask you this. We talked about the global economy, we’ve talked about the US economy, we’ve talked about PPACA, great state of New Jersey, we’ve got a rock solid governor in Christie who is doing a lot if things, most of which is great. What steps should Governor Christie take now to improve business in New Jersey? He can’t the global economy, but what can he do here?
Mardy: I think he’s kind of signed on to the whole idea of the healthcare act. He was initially opposed to it. I mean the Supreme Court put an end to that. There are a couple of issues that New Jersey faces. One of the things that I criticize the governor for and I think he’s done a pretty good job, but one of the things that I criticize him for is going through with that third tunnel that we need in New Jersey. That would have created a ton of jobs. We would have paid for, but we would have also reaped the benefits of it. I saw a statistic where public work spending has an incredible internal rate of return on all public works spending. I’m not talking about a bridge to nowhere. I’m talking about a bridge to Manhattan for commuters. That would’ve had a huge return on investment, but more importantly, I think the governor has the right direction. One of the things that we have in Jersey, it’s a terrible problem, all these wealthy people, once they reach retirement, they want to leave the state. They want to leave the state for a bunch of reasons, not necessarily because we’re a high cost state. I took an estate planning course. The instructor said that if you want to die, don’t die in New Jersey. Don’t get sick and die in New Jersey because the estate tax is ridiculously high and people leave the state or go over to Pennsylvania because of it.
Zezas: Florida, Pennsylvania, a lot of places.
Mardy: One of the things that he could is probably do something to reform the estate taxes in Jersey. I think he could pay for it. You deal with New Jersey’s budget problems by raising gas tax just by a couple of pennies. You buy gas in NY, in Pennsylvania, 10 to 15 cents more expensive in some cases than New Jersey. You don’t have to get to parity, but you can get closer.
Zezas: You raise the gas tax 2 cents and you can get closer.
Mardy: And the state is not without its budget problems and that would be of some help
Zezas: Your thought is that the State should modify it in some way in which retirees stay.
Mardy: I think that you want people who get Federal benefits, social security retirement benefits. You want them to spend it in New Jersey. You don’t want them to leave the State as soon as they’re worried about the State putting their hand in their pocket and taking their money away. As far as business is concerned, New Jersey is a great place to do business. You have great people you can hire. You have great universities, great school systems. You have excellent road systems, great infrastructure. You have 3 great airports in the area. I think there are a lot of things that Christie has done to make New Jersey business friendly. I think I applaud those efforts, but I you have to keep people here. You can’t just let people leave the State.
Zezas: Mike for a financial executive you sound an awful lot like an economist.
Mardy: Well, everything I do involved analyzing economics. TUMI is a company that very much is in tune with what is happening in the economy. You can track our company’s performance against GDP, against air passenger miles, stock market performance, all those things are relevant to how our company performs. So, you have to be very aware of what’s going on in the economy.
Zezas: Well, obviously because of great management and executives like yourself, TUMI has some wonderful products. Mike, this has been wonderful. I want to thank you for joining me today on CFO Studio. I hope you’ll come back and see us again sometime.
Mardy: Andy, it was my pleasure. It was good to see you again.
Zezas: The pleasure was mine. This is Andrew Zezas, your host at CFO Studio, with Mike Mardy, CFO of TUMI Holdings, saying thank you very much for watching, we’ll see you again real soon.