Vestis Q1 Results: Uniform And Workplace Player Faces Growing Concerns

seekingalpha05-04

Vestis Corporation, the uniform and workplace business spun off from $Aramark(ARMK-W)$, is facing pressure on its 2024 results and has seen a significant sell-off in shares.The company's sales have ...

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Jin_Youngin In November, I believed that while Vestis Corporation (NYSE:VSTS) posted a positive earnings report after its spin-off, that not all separation questions (in the form of pro forma earnings implications) were answered. Vestis, the uniform and workplace business, which has been spun off from Aramark (ARMK) in October of last year, has been separated from Aramark´s core food distribution business. Having two independent management teams which can run their own businesses, and control their own capital allocation, should in theory create an interesting set-up (at least on paper) but still many questions needed to be answered. The company now sees real pressure on the 2024 results and amidst a very leveraged balance sheet has seen shares sell off quite aggressively, as the leverage prevents me from automatically buying this huge pullback. About Vestis Vestis is a $2.7 billion business which is split half-in-half between revenues generated from the sale of uniforms and workwear, as well as revenues generated from selling and distributing towels, linen services, restroom supply services and associated products and services. The business is focused on North America, generating 90% of sales in the U.S., and the remainder in Canada. The operations of the company are quite extensive, as the business employs some 20,000 workers who serve some 300,000 customer locations, as the company claims a 6% market share in the so-called industrial service offering industry, being the 2nd largest operator in this huge $50 billion industry. The company furthermore sees long-term growth driven by outsourcing and specialization trends, as the company aims to grow sales in the mid- to high-single digits, with EBITDA margins seen between 18 and 20% of sales. A $2.6 billion business in 2019 saw sales fall to $2.4 billion in 2021, as sales rebounded to $2.6 billion in 2022. This feels a bit soft, given the inflationary trends observed meanwhile. For the year 2022, the company posted adjusted operating profits of $266 million, as EBITDA of $373 million resulted in margins equal to 14% of sales. Believing that the company would post sales of $2.8 billion in 2023 and operating profits of $270 million, while including a $20-$25 million cost to become an independent public business, I believed that operating profits might come in around a quarter of a billion. This was badly needed as net debt of $1.47 billion worked down to a 4 times leverage ratio based on EBITDA of $373 million. With interest costs seen at $70 million, net profits might come in around a dollar per share, resulting in a mid-teens earnings multiple at $17 per share. This market multiple and above-average leverage position made me not necessarily upbeat, although that long-term margin expansion might have driven appeal, but the burden of proof lay with management which first had to execute. In November, the company posted a 5% increase in fourth quarter sales, as margins were quite strong as well. With net debt down a little bit to $1.45 billion, while full year adjusted EBITDA improved to $404 million, leverage ratios already came down to 3.6 times. The company guided for a 4.0% to 4.5% increase in 20214 sales, with EBITDA margins expected to be replicated around 14.3% of sales, which is a bigger achievement than it seems as the company will have to absorb the costs of running a publicly run business. With earnings power on track to exceed a dollar per share, the initial signs looked good, but the company really first had to deliver on some of its promises and potential. A Bombshell Report With shares of Vestis trading around the $20 mark and high-teens since the spin-off, they plunged overnight from $18 per share towards the $10 mark early in May following the release of the second quarter results. In February, Vestis still posted a 2.5% increase in first quarter sales to $718 million, with adjusted sales growth reported at 4.5%, with the company reaffirming the full year sales guidance. In the same month, the company embarked on some refinancing actions, all earmarked to reduce interest expenses and manage the maturity profile of debt. The real shortfall was seen in early May 2024 when the company posted second quarter results. Reported revenues were up just 0.9% to $705 million, with adjusted sales growth reported at 2.8%. The problem was seen in the margins, as adjusted operating profits of $43.1 million were down nearly 13%, with adjusted EBITDA margins down nearly a point to 12.4% of sales. Of this 90 basis point reduction in margin, some 60 basis points were the result of the costs incurred from being a publicly traded business. A Big Impact On The Outlook, And Leverage Concerns While the second quarter results came in soft, the company cut the full-year guidance in a big(ger) way. Instead of mid-single digit sales growth, full-year sales are seen flattish at best, as they might fall by a percent. Given the modest growth reported in the first half of the year, that clearly shows the expectation that trends are set to worsen here, as the roughly 5% cut in the full year sales guidance is split pretty evenly between volumes and pricing declines. With adjusted EBITDA margins seen at 12.2% of sales (plus or minus 20 basis points), this really is a big profit warning, with trends worsening because of the assumed leverage, as margins will take a beating of around 2%! (almost entirely on the back of softer pricing). The only bright spot is that net debt is down to $1.39 billion, as that is badly needed given the big profit warning issued here. The original outlook called for sales around $2.95 billion, with adjusted EBITDA seen around $420 million. Currently, full-year sales are seen around $2.80 billion, with EBITDA seen around $346 million, marking about a $75 million headwind in terms of EBITDA. Not only does this have huge implications on the earnings power of the business, it pushes leverage ratios up to more than 4 times here (again). This clearly spooked investors as shares plunged 40%, with the 131 million shares now valuing equity at valuations equal to about the net debt load here. With a current $2.7 billion enterprise valuation, valuations look quite reasonable, but not necessarily very attractive given the leverage and shortfall in the results. Moreover, perceived gaps in service levels, pricing fatigue and turnover of higher margin customer all add to the concerns here. Frankly, one of the few bright spots is that cash flow conversion is seen above 100%.  While the big Vestis Corporation sell-off naturally is compelling to me, I am not convinced enough of the quality of the business here, so I will take a wait-and-see approach for now.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2432138905"}