Growing Pains Cut Into Unifirst Results
Unifirst (NASDAQ: UNF) has been working hard to grow its business in an effort to compete more directly with uniform and business services company Cintas (NASDAQ: CTAS). Looking at the top line, those efforts are paying off but it is costing the company on the bottom line. The bottom-line results, and the guidance, reveal not only the impact of aggressive internal efforts to retain employees, and clients, and expand the brand but the impacts of inflation as well. In our view, Unifirst is well-positioned for the times but now isn’t the right time to buy into the story.
Unifirst Grows Revenue But Margins Contract
Unifirst had a good quarter when looking at the top line and it even beat the consensus but that is about all the good news we have. The company reported $511.55 in consolidated revenue for a gain of 10.2% over last year but significant margin compression is present as well. The gains were driven by a 10% increase in core Laundry sales that were compounded by a 7.7% increase in specialty garments.
Moving on to the margins, the company reported a 37.8% decline in operating income, a 40.3% decline in net income, and a 40% decline in GAAP EPS that is due to the combination of growth investments and inflation. The company says growth efforts trimmed $11.4million off of the income which is enough to offset some but not all of the margin decline. When adjusting for those costs, the operating and net income declines improve to -16% and -20% but are still deep in negative territory. Looking forward, the company sees these pressures, both of them, continuing in the 4th quarter and have adjusted the guidance accordingly. The company is looking for revenue above the previously stated range and the Marketbeat.com consensus but reduced the outlook for margin. The new earnings guidance is now below the previously stated range and the Marketbeat.com consensus and we see downside risk in the numbers. One of the driving forces of the business is tight labor market conditions, conditions that are presenting problems for Unifirst too.
Unifirst Returns Capital To Shareholders
Unifirst pays a very safe dividend albeit with a small yield. The stock is yielding about 0.75% compared to Cintas's 1.05% but it does trade at a lower valuation. The dividend is backed up by a 15% payout ratio and a debt-free, cash-heavy balance sheet so we are expecting increases to continue. The company has increased the payout for 5 years and at an aggressive 50% CAGR but we see the growth rate falling over time. In addition, the company is buying back stock and purchased $15.7 million worth of shares in Q3. This leaves about $71.6 million under the current authorization or roughly 2.3% of the market cap with shares trading at $162.
The Technical Outlook: Unifirst Might Be At The Bottom
Shares of Unifirst might be at the bottom but we’re not betting on it just yet. The price action is up in the wake of the report but not in any way we’d call bullish. At best, shares of this stock may wallow at or near the current level but we aren’t expecting a rebound without margin and earnings improvement. Until then, there is a risk the downtrend will continue and move the price action below the $155 level and bring the COVID-induced low back into play.
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