UniFirst Corporation Fiscal Second-Quarter Misses on Margin Pressure

UniFirst reported fiscal second-quarter adjusted EPS of $1.27, which were flat year-over-year and below both our $1.36 estimate and the $1.39 Street consensus. The miss was mainly driven by margin pressure, as multiple factors, such as increased natural gas prices, elevated bad debt expense, and lost leverage in the Specialty Garments business, all hit at once. While it is difficult to gauge how much of this pressure is permanent, we believe higher costs will likely weigh on profitability in the near term.

The operating environment appears steady and sufficient to support decent core revenue growth, but we continue to believe some acceleration in employment trends is necessary to drive higher gross margins from increased route density and sustain better earnings growth. At about $102, the stock is trading at 17 times and 16 times our new calendar 2014 and 2015 EPS estimates, respectively, versus a historical average of 14 times.

While growth remains somewhat tempered by the sluggish employment environment (wearer additions were slightly negative for the quarter), we believe UniFirst and other large industry players are doing a solid job sustaining decent organic growth by gaining share from smaller regional players, which should position them well for stronger growth when hiring eventually recovers.

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