Cintas Corp. (CTAS 197.17, -10.95, -5.26%) is trading modestly lower after the
company reported Q3 (Feb) earnings last night. Cintas is the largest supplier
of work uniforms in the US (shirts, jackets, pants, footwear, etc.), operating primarily
on a rental basis, though it does make sales as well. Corporate customers of
the company’s uniform services range from restaurant and hospitality sector
organizations like McDonald's, Starbucks, and W Hotels to oil and gas rigs,
which require more durable uniforms for mechanics and workers.
Non-GAAP EPS rose 34% yr/yr to $1.84 while revenue rose 5.9% yr/yr to $1.68 bln. EPS was well above market expectations while revenue was basically in-line. In terms of guidance for FY19, Cintas upped its outlook for non-GAAP EPS to $7.30-7.38 from $7.42-7.48. The upper end of its revenue outlook was lowered slightly to $6.87-6.885 bln from prior guidance of $6.87-6.91 bln.
Last quarter, CTAS reported nice revenue upside, but this time revenue was just in-line. The organic growth rates of both CTAS' segments were hurt by a greater number of customers being closed for business in this year's FebQ compared to last year's due to severe winter weather and the timing of the holidays. Christmas Eve and New Year's Eve fell on a Monday this year compared to on a Sunday in the prior year. To illustrate the magnitude of the headwind, CTAS notes that one workday is worth about $26 mln. The loss of one workday also has a negative impact on operating margin.
Based on the Q&A during the call, it's clear that analysts viewed Cintas' Uniform Rental segment as performing below expectations. Unfortunately, CTAS does not expect many sales to be bumped into Q4 (May). CTAS also made the point that many customers not only took off the holiday but also took off the Monday before the holiday, creating extra disruption.
Another problem was the weather. The polar vortex, for example, caused customer shutdowns from Minnesota all the way to the East Coast. In addition to leading to lower day rates, weather disruptions also inhibited the ability of CTAS sales people to gather momentum regarding meeting with decision makers. It also had an impact on the CTAS drivers who deliver the uniforms.
Looking ahead, CTAS sees a broad opportunity that is certainly not fully penetrated. CTAS likes its opportunity to sell to existing customers. CTAS is also not seeing a change in its ability to execute, barring something happening in the macro that throws a wrench in the works.
In sum, this was a decent quarterly report and guidance for Cintas considering the headwinds they were facing this winter in terms of the timing of the holidays and the cold weather. That CTAS posted big EPS upside despite in-line revenue tells us that margins were quite robust.
From a broader perspective, Cintas is benefiting from a strong overall economy and a falling unemployment rate: more workers means more uniform rentals. The stock has made a big move in recent months, going from $156 in late December to close at $208 yesterday, so it's not surprising to see a little profit taking on the slightly disappointing top-line result. As you can imagine given the company’s business and direct correlation with workers, the stock price will be closely tied to the overall economy. For the time being, the strong economy is acting as a nice tailwind.
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