Aramark Needs To Deliver Better Growth And Improve Margins

Food, facility, and uniform services company Aramark (NYSE:ARMK) has been a laggard for some time, with the shares trailing its closest peers Compass Group (OTCPK:CMPGY) and Sodexo (OTCPK:SDXAY) over the last few years. This underperformance has come as the company has found it difficult to meet its growth targets, and there is still some skepticism as to whether management will succeed in driving meaningful expense reductions.

I do think the company can and will do better both in terms of revenue growth and margin improvements, and the mid-teens FCF growth that I model would support around 9-10% total return potential. That's a little shy of my typical return goal, and I would like a little more upside relative to the risk of ongoing underperformance relative to the likes of Compass. That said, Aramark does serve sizable markets that can support mid-single-digit revenue growth, and some of the company's early IT-driven cost-reduction efforts do seem to be working, so I can't completely dismiss the bull case.

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Aramark Needs To Deliver Better Growth And Improve Margins

Investopedia: UniFirst Shan't Be Last

With the reports of job growth still fairly unimpressive, it would seem logical to think that the providers of uniforms to employers would be in trouble. That's the problem with making assumptions about what constitutes "logic" sometimes - in actual fact, uniform service providers like UniFirst (NYSE:UNF) are still seeing respectable growth in revenue and these shares have been fairly strong on a relative basis.

More Growth to Start the Fiscal Year  
UniFirst reported that revenue rose almost 15% for the fiscal first quarter, stimulated by 17% growth in the small Specialty Garments business and a solid 12% organic growth in the core laundry business. The first aid business was also strong (revenue up more than 22%), but it represents a trivial part of the company's total revenue. (For related reading, see A Look At Corporate Profit Margins.)

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Men's Wearhouse Gets A Sharp Markdown

Men's apparel retailer Men's Wearhouse (NYSE:MW) may guarantee that its customers will like how they look, but that doesn't guarantee that shareholders will be happy. Although the company's third-quarter report held no particularly bad surprises, management guided toward a larger loss in the fourth quarter and traders swiftly cut down the price of the stock. 

A Mixed Bag for the Third Quarter 

On the top and bottom lines, there was not much to fault about the third quarter at Men's Wearhouse. Revenue jumped 19% and handily exceeded even the highest published estimate. Sales were helped by 13% growth in tuxedo rentals, 8% growth in the retail segment and over $50 million of acquired growth in the corporate apparel segment. That puts overall organic growth more in the range of 8% (and consistent with comp-store growth of 9.6% at Men's Wearhouse) - a level that compares favorably to MW's most direct comparable, JoS. A. Bank (Nasdaq:JOSB), which reported overall growth of 7% and comp-store growth of 3% for its third quarter. 

Profitability, however, was more problematic. Gross margins dropped a full point, due in large part to aggressive promotions. Consequently, a more than two-and-a-half point drop in clothing margins offset ongoing improvement in the very high-margin tuxedo rental business. Although operating expense growth of 16% was less than sales growth (so there was positive leverage), that is still a pretty rapid pace of growth - even stripping out some "one-time costs" leaves SG&A growth at 12%; a level that may still concern investors waiting to see whether this company can recapture past margin leverage.

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