$UNF UniFirst Q3 2025 Earnings Conference Call

Thank you and good morning. I'm Steven Sintros, UniFirst President and Chief Executive Officer. Joining me today is Shane O'Connor, Executive Vice President and Chief Financial Officer. We would like to welcome you to UniFirst Corporation's conference call to review our third quarter results for fiscal year 2025. This call will be on a listen-only mode until we complete our prepared remarks. But first, a brief disclaimer. This conference call may contain forward-looking statements that reflect the company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties. The words anticipate, optimistic, believe, estimate, expect, intend, and similar expressions that indicate future events and trends identify forward-looking statements. Actual future results may differ materially from those anticipated depending on a variety of risk factors. For more information, please refer to discussion of these risk factors in our most recent Form 10-K and 10-Q filings with the Securities and Exchange Commission. Our third quarter results were largely in line with our expectations. It is rewarding to see our recent investments beginning to yield measurable returns, evidenced by gross margin improvement and more effective execution across the business. I want to sincerely thank all of our team partners who continue to always deliver for each other and our customers as we strive toward our vision of being universally recognized as the best service provider in the industry, all while living our mission of serving the people who do the hard work. We serve the people who do the hard work, as they are the workforce that keeps our communities up and running. They are our existing and prospective customers, as well as our own UniFirst team partners. Our mission is to enable those employees and their organizations by providing the right products and services to do their job successfully and safely. Whether that means providing uniforms, workwear, facility services, first aid and safety, cleanroom, or other products and services, our goal is to partner with our customers to ensure that we structure the right program with the right products and services for their business and team, all while providing an enhanced customer service experience. Third quarter consolidated revenues were $610.8 million, an increase of 1.2% from fiscal 2024. Earnings in the quarter reflect improvements in our gross margin as well as several unusual items that impacted our profitability, which Shane will discuss in more detail shortly. Our team continues to focus on investing in our people, technology, and infrastructure to further enable growth and profitability. The benefits of this strategy will take time to be fully realized, but we are confident in our ability to seize the significant opportunities ahead and drive significant shareholder value. As mentioned, we are pleased with the progress we continue to make in the areas of operational execution and gross margin enhancement. Core laundry operations key operational costs continue to trend favorably, with benefits being recognized in both merchandise and plant production expenses. To date, we have not experienced significant headwinds from the newly imposed tariffs. However, we have started to see some of our vendors increasing prices related to their additional sourcing costs, and we foresee potential for future increases. The tariff situation remains fluid, and we will continue to provide updates in the coming quarters. Overall, we believe we have positioned ourselves well to navigate the disruption with our efforts over the last few years to improve the diversification within our supply chain. From a topline perspective, there were positive performance trends from both our sales and service organizations. In the quarter, we installed more new business than a year ago by a solid margin. And consistent with our expectations, customer retention improved compared to the third quarter of 2024. However, a pricing environment that continues to be challenging, as well as some incremental softness in our customer wearer levels, has limited our ability to build more topline momentum. Additionally, growth in the quarter was impacted by lower direct sales revenues compared to the same quarter of the previous year. Direct sales trends can vary with respect to timing. However, our full-year direct sales assumption remains the same and continues to reflect growth over fiscal 2024. As a company, we will continue to focus on investments in the business that will enhance our ability to attract new customers, sell additional products to our existing customers, and improve our customers' experience and drive improved retention. From a profitability perspective, we continue to believe there is ample opportunity with ongoing efforts focused on driving continued improvement and consistency in our operational execution. We are excited about the progress the team is making in aligning our operations around the UniFirst Way, which focuses on creating excellence in executing scalable, repeatable processes to drive a consistent and differentiated customer experience and is critical for us to achieve our goals. Opportunities also exist in the areas of strategic pricing, procurement, sourcing, inventory management, among others. And as we have talked about, our new ERP system and related technology investments will be fully enabling these benefits. However, ahead of a full implementation, we are working to take advantage of the opportunities available to us in the midterm and setting ourselves up for more robust improvements post-deployment. With that, I will turn the call over to Shane, who will provide more details on our third quarter results as well as our outlook for the remainder of fiscal 2025.

Sure. I'll start with the existing customer base. In general, I think I would characterize the mood of the existing customer base as somewhat cautious in terms of investments in heads, and we have seen some targeted reductions from some of our... and again, when I talk about our customer base, it's easier for me to have more specific visibility to some of the larger customers, but we have seen examples of cutbacks on employment levels in some targeted manufacturing sector companies. Just in general, we've talked about last quarter how we saw some incremental pickup in reductions, and that has continued this quarter at a somewhat higher level, somewhat offsetting the benefits recently on improved retention as well as solid sales performance. Obviously, those things all sort of work together, and any trend in the current quarter only impacts the current quarter so much. But when you look at the four components of growth, again, we feel good about our new account sales and the retention trajectory that we're on, but seeing some softness in those other areas which over the short term are impacting the overall growth.

Yeah, it's a good point. Obviously, we've been talking about for the last year coming out of a very high inflationary environment that things were taking a step back from a pricing perspective. I think as we're transitioning now potentially, and this is why it's such a fluid situation, into an environment where tariffs may be impacting vendor cost or some of our own cost, it's a little bit of a wait and see to how that impacts pricing going forward. I think we're sort of in this in-between state right now where companies are still looking to recover from a lot of the inflation that they experienced over the last couple of years, obviously with an eye toward what might be coming with respect to tariffs. So I would say we're still sort of stuck in the middle on that right now, and it's unclear how that's going to play out over the next quarter or two.

No, I wouldn't say so. When I talk about pricing generally, it's really across our customer base. Large, medium, small customers. I think we talk about the competitiveness, and I wouldn't say there's any particular sector or size of customer that is being more impacted.

No, I wouldn't say they're significantly different. I think we talked in the first quarter about having a little bit of a slower start to the year, particularly from a year-over-year comparison. You remember back in early 2024, we sold a really large national account. But over the last couple quarters, we've started to pick up some momentum. So I would say it's incrementally positive today compared to six months ago, but not a dramatically different percentage when you look at it as a component of our overall growth.

Yeah, I think we mentioned last quarter and it flipped into the negative position, and it still remains negative, a little bit more so in the current quarter.

I think the caution from customers is overall, so it probably does have some ancillary impact on that. That being said, and not as much impacting the current quarter, but we've talked before about we think we have a lot of opportunities to continue to penetrate our customers more holistically over time with direct sales and other facility products that we were probably somewhat underpenetrated today. So we still feel good about that opportunity, but as far as what's going on today, yeah, some of that probably is wrapped up a bit in the caution.

Yeah, holistically I think it's pretty stable right now. I mean, again, I referenced the heavy inflation we went through over the last couple of years, and I think the combination of moves that we needed to do during that time to increase wages and so on, as well as the overall stabilization of the employment environment a bit, we've been in pretty good shape there. And I think that's some of the improvements we're seeing in execution as that labor force has become more stable, less overtime, less turnover, higher efficiency. So we feel pretty good there. There has been some impact from some of the immigration changes, but not something notable in terms of impacting our overall performance.

Yeah, good question. I mean, obviously with 300,000 customers, it's hard to kind of narrow that down. I would lean on that it's a little bit broader. No one customer or even sector really makes up the majority of the trend. So I think I'd probably just have to answer saying it's a little more broad-based.

I'd like to thank everyone for joining us today to review our results, and we look forward to speaking with everyone again in October when we expect to report our fourth quarter performance as well as our outlook for fiscal 2026. Thank you and have a great day.