Cintas Corp ($CTAS) Q3 2026 Earnings Call

Good day everyone and welcome to the Cintas Corporation announces fiscal 2026 third quarter results conference call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Jared Manningly, vice president, treasurer and investor relations. Please go ahead sir.

Thank you Ross and thank you for joining us. With me are Todd Schneider, president and chief executive officer, Jim Rosakis, executive vice president and chief operating officer, and Scott Gerula, executive vice president and chief financial officer. We will discuss our fiscal 2026 third quarter results. After our commentary, we will open the call to questions from analysts. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the Securities and Exchange Commission. I'll now turn the call over to Todd.

Thank you, Todd. Our business continues to perform exceptionally well. We're adding new customers who rely on us for image, safety, cleanliness, and compliance needs while successfully cross-selling additional solutions to our existing customer base. Retention remains at record levels while pricing is consistent with historical levels. Turning to our business segments, as Todd mentioned, we delivered attractive growth rates across all of our business segments. Organic growth by business was 7.3% for uniform rental facility services, 14.6% for first aid and safety services, 10% for fire protection services, and 3.1% for uniform direct sale. Gross margin percentage by business was 50.3% for uniform rental facility services, 58.1% for first aid and safety services, 50.5% for fire protection services, and 41.4% for uniform direct sale. Gross margin for the uniform rental facility services segment increased 30 basis points from last year. The 50.3% gross margin is the highest gross margin ever for this segment. We executed a high level in the third quarter and our continued strong topline growth helped drive results. We've been laser focused on managing the many inputs we control effectively. We've invested in technologies like SAP to improve our capabilities and the strong performance of our supply chain continues to be a significant strategic advantage for us. Gross margin for the first aid and safety services segment was 58.1%. This is also an all-time high. We are investing in route capacity to serve more customers, leadership and management trainees to build our talent pipeline, advanced technologies to drive efficiency, and we're adding selling resources. All of which are fueling the attractive double digit growth we are seeing. It's important to remember that margins of all our businesses can fluctuate from quarter to quarter based on several factors, including things like revenue mix and the timing of our investments. Incremental margins were effectively 28% for the quarter after adjusting for the onetime gain on the asset sale last year, right in line where we like to be. The current macro environment is certainly complex. We help businesses navigate this environment by letting them focus on running their business. Delivering consistent excellence in a complex environment is never easy, but customers want reliable partners with proven solutions. Our diversified customer base and strong value proposition continues to resonate, particularly in our core verticals, healthcare, hospitality, education, and state and local government. In addition to being aligned with resilient sectors of the economy, our total addressable market is very large and our solutions remain essential for businesses of all sizes, regardless of how complex the economic environment. We have consistently shown an ability to convert businesses over to a managed rental solution, typically around two-thirds of all of our new customers. In addition, we've shown an ability to grow multiples of job creation and GDP. Lastly, we're very enthusiastic about integrating UniFirst and team partners into our organization, which we believe will strengthen our ability to better serve our customers. As a reminder, we anticipate that transaction will close in the second half of calendar 2026. With that, I'll turn the call over to Scott to discuss our operating income, capital allocation performance, and 2026 guidance assumptions.

Thanks, Jim. And good morning, everyone. The exceptional results we delivered in terms of revenue growth and gross margin expansion translated into continued strength in operating margins and cash flow. Selling and administrative expenses as a percentage of revenue was 27.8% which was a 60 basis point increase from last year. When you adjust for the one-time gain on the asset sale last year, SG&A would have been flat year-over-year. Third quarter operating income was $659.9 million compared to $69.9 million last year. Operating income as a percentage of revenue was 23.2% in the third quarter of fiscal 2026 compared to 23.4% in last year's third quarter. Adjusting for the one-time gain last year, operating income as a percentage of revenue would have increased 40 basis points year-over-year. Our effective tax rate for the third quarter was 20.6% compared to 21% last year. The tax rates in both quarters were impacted by certain discrete items, primarily the tax accounting impact for stock-based compensation. Net income for the third quarter was $52.5 million compared to $463.5 million last year. This year's third quarter diluted earnings per share was $1.24 compared to $1.13 last year, an increase of 9.7%. Earnings per share increased 12.7% after you adjust for the one-time gain last year. Our disciplined approach to capital allocation has positioned us well to finance the recently announced agreement with UniFirst. With leverage expected to be about 1.5 times debt to EBITDA at closing, we maintain flexibility for deploying capital across each of our priorities. During the first nine months of fiscal 2026, we have returned $1.45 billion in capital to our shareholders in the form of dividends and share buybacks. Earlier, Todd provided our updated guidance for the remainder of the fiscal year. In addition, please note the following in the guidance. Both fiscal 2025 and fiscal 2026 have the same number of work days for the year and by quarter. Our guidance does not assume any future acquisitions. Our guidance assumes a constant foreign currency exchange rate. The fiscal 2026 net interest expense of approximately $11 million. A fiscal 2026 effective tax rate of 20% which is the same compared to our fiscal 2025. And the guide does not include the impact of any future share buybacks or significant economic disruptions or downturns. As both Todd and Jim have mentioned, we are excited about the recently announced UniFirst acquisition. While the deal is expected to close in the second half of calendar 2026, we expect to incur non-recurring transaction costs related to the acquisition. The adjusted diluted earnings per share guide excludes the estimated impact of these transaction costs. Transaction costs expected to be incurred during fiscal 2026 are estimated to have an impact on diluted earnings per share in the range of 3 cents to 4 cents. In addition, beginning with the fourth quarter, we will break these costs out on our income statement as a separate line item to provide visibility to these transaction related costs. With that, I'll turn it back to Todd for some closing remarks.

Thank you, Todd. That concludes our prepared remarks. Before opening it up for questions, I'd like to reiterate Todd's earlier statements about the UniFirst acquisition process. In order to avoid speculation, we will not provide any additional commentary on that process. We will update the market, however, as appropriate. Now, we are happy to answer questions from the analysts. Please ask just one question and a single follow-up if needed. Thank you.

If you would like to ask a question, please press star one on your telephone keypad. Now, please be prepared to ask your question when prompted. You will also be allowed to ask one follow-up question. Once again, if you would like to ask a question, please press star one on your phone now. And our first question comes from Tim Mulhoney from William Blair. Please go ahead, Tim.

Scott, Jim, Jared, good morning. Just two procedural ones. Scott, I just wanted to follow up on the guidance thing that you were mentioning at the end. How much of that 3 to 4 cents of EPS related to the UniFirst transaction was incurred in the third quarter versus expected in the fourth quarter? I didn't see a reconciliation table for the third quarter and just wanted to make sure everyone's aligned on their models. And I also noticed SG&A was a little bit higher in the third quarter than what folks were expecting. So I thought maybe there was a little bit of deal related expense there in the third quarter. I'm not sure.

Yeah, Tim. Good morning. Good question. The estimate that we provided of that 3 to 4 cents is related to the fourth quarter in the fiscal year guide. Any costs that were incurred in Q3 were immaterial. As far as the comment on SG&A being a little higher, just remind everyone of that one-time gain last year. That represented about 60 basis points. So when you take that into consideration, SG&A was effectively flat year-over-year. And if you go back really over the last three fiscal years, Q3 is typically elevated due to the timing of certain expenses like the reset of payroll taxes. In fact, when you go back to last fiscal year and you back out the adjustment for the one-time gain, we were up 100 basis points sequentially last year and actually 70 basis points sequentially if you go back to fiscal year 24. So, we feel really good where we are with SG&A expenses. And when you back out the one-time gain, it's flat year-over-year.

Yeah, good point, Scott. I think maybe consensus didn't fully factor in everything because of the one-time gain last year. So, that's a good reminder. Thank you. And then just as my follow-up, apologies if I missed it, but how much were energy costs as a percentage of revenue in the quarter? And what's your expectation for next quarter? Given the increase we've seen in oil prices over the last few weeks, I think this is an important question for investors.

Yeah. Tim, good question. Energy for the quarter was 1.7% which was flat year-over-year and up 10 basis points over the previous quarter. Certainly the increase in gas prices will have an impact. But just I want to remind everyone that only 60% of our energy costs are related to fuel for our vehicles which when you do the math on that, that equates to about 100 basis points. So if you just look at fuel, it's been continuing to increase but if you assume a 30% increase in fuel cost that would be sustained over an entire quarter, that would add 30 basis points of cost to our results. So yes it has an impact but not something that we feel that we can't overcome. And we have contemplated this in our guide.

Got it. Thank you.

And our next question comes from George Tong from Goldman Sachs. Please go ahead, George.

Hi, thanks. Good morning. Can you provide an update on higher level customer purchasing behaviors in the current macro environment? If you're seeing any changes, any increases or reductions.

Got it. That's helpful. And then going back to an earlier point on fuel, you mentioned that fuel expectations are contemplated in your full year guide. Can you elaborate on what exactly you're assuming for the remaining quarters of the year in terms of how fuel will trend and how you plan to pass along any changes in fuel costs to customers in the form of pricing?

Yeah. Thank you, George. As Todd mentioned, clearly this is a dynamic environment. And our guide includes our best estimate of the increase in energy cost. As far as our approach to mitigating this or I think you said pass it along, I'll let Todd answer that.

Very helpful. Thank you.

And our next question comes from Justin Hauk from RWB. Please go ahead, Justin.

Good morning. Thanks for taking the question. I guess I had one question just kind of on the capex expectations. Your capex as a percentage of revenue has historically been a lot lower than UniFirst has been. Obviously, you guys are much bigger. So, that's part of it. But I guess just philosophically, looking at their assets and the systems to kind of get to levels, just thinking about do you expect the capex to kind of trend a little bit higher as a percentage of revenue in the first couple of years of integration? Thank you.

Yeah, Justin, good question. And I would just say, we just announced the agreement a couple weeks ago. We'll know a lot more as we close the deal. But when we close this merger, we still expect not only will we continue to generate strong cash flow, UniFirst will generate strong cash flow. We'll have a strong balance sheet. We talked on our UniFirst call about at closing we would expect debt to EBITDA being at 1.5. So we're in a great position and I don't see our capital allocation priorities really changing. Our first priority has always been reinvesting back into the business through capex, followed by strategic M&A and then we'll continue to look at returning capital back to our shareholders in the form of dividends and buybacks. So, more to come on what we would look at in the future with capex as a percent of revenue, as we close the deal, but I would really not anticipate any material changes in our capital allocation priorities.

Yeah. No, certainly agree on all that. I think that's it. My other questions have been answered on the items that you already addressed. So thank you very much.

And our next question comes from Manav Patnik from Barclays. Please go ahead, Manav.

Hi, this is Ronan Kennedy on for Manav. Good morning and thank you for taking our questions. You commented on retention at record levels, pricing at historic levels. Could you please provide some further color as to how we should think about what those levels are as a reminder and then the trends and drivers versus your expectations for new business and cross-sell and then anything to call out from specifically strong organic drivers at a respective segment level, please.

Yeah. Hey, Ronan, this is Jim. Good morning. I'll take that question. I'll start with it. And if we start to think about our growth formula and what we're attempting to achieve every quarter, we do like to target that mid to high single-digit total growth rate. As an organization, the major contributors to that growth as you correctly pointed out is our new business acquisition. And a reminder, two-thirds of that new business acquisition comes from that no-programmer or do-it-yourselfer space. And that continues to perform very well for us and we really like the trend line there. Retention levels for us has stayed around that steady 95% rate and we are really comfortable where that is at this point. Pricing is at our historical levels which we've consistently said is in that 2 to 3% range. And then the remainder of the growth if you kind of put all those together, you start with a negative 5, you add in 2% for pricing and you want to get up to 8, the majority of that's new business but then the remainder is that cross-selling opportunity selling into the current customer base which has been highly effective for us this year and we think that there's a long runway of opportunity within our current customer base as we continue to provide great value. We think about it long term, we've made nice investments in the product line and the technology and try to make it easier to do business with us. And the customers in this type of an environment is complex are looking for steady answers and they know they could rely on us. So we've had a lot of success this past year. So I would say new business and cross-sell slightly continuing to improve and the others right where we expected them to be.

Thank you. Thank you Jim. Appreciate it. And then for my follow-up, kind of a follow-up to Tim and George's questions, but beyond gas prices, I guess focusing on the all-time high gross margins in each of the segments. Can you just further unpack the drivers there? I know it's strategic investments, cost initiatives and assess the sustainability of them. I know there may be a potential immediate impact if there is inflation, but also unpack the other components of your key cost buckets from a gross margin standpoint beyond gas, whether that's materials or the production expense, the labor, etc. So drivers of gross margins and sustainability in near-term and longer term given the dynamics.

Hey Ronan, I'll start on that and see if anybody wants to add color and I'll start at the consolidated level and say that the gross margin at 51% for the quarter obviously a great quarter for us. The team did an excellent job at execution for the quarter and I think a little bit of that is a demonstration of our culture and the belief that nothing is ever as good as it can be and that there's always an opportunity to improve processes and work at inefficiencies. But if we look at and we think about the quarter in and of itself, first of all there was no one-timers, nothing significant from a one-timer perspective that helped the quarter. The key drivers of that is our primary focus which is revenue growth and we like strong revenue growth to continue to create leverage. And that certainly contributed in all three of our route-based businesses. We are always looking for initiatives to

Thank you. Appreciate it. And then anything to be mindful of from the other cost buckets and potential inflation there on whether it's materials, labor or otherwise.

Got it. Thank you very much. Appreciate it.

And our next question comes from Josh Chan from UBS. Please go ahead Josh.

Hi, good morning Todd, Jim, Scott, Jared. I guess in terms of your investments, how do you feel about your level of investments kind of exiting 2026 and into just thinking about how well funded do you think your growth initiatives are at this point? Thank you.

Sure. Sure. That makes a lot of sense. Yeah. Thanks for the call, Todd. And then I guess in terms of your comment about the good balance sheet position, does that imply that you can continue to perhaps repurchase stock as you desire even through this process or how should we think about sort of the pace of buybacks? Thank you.

Okay, great. Thanks for the call and thank you for the time.

And our next question comes from Jasper Bib from Truist Securities. Please go ahead, Jasper.

Hey, morning guys. Just wanted to ask what you're seeing in wearer levels at existing customers in uniform.

Nice. That makes sense. And then I know we just got UniFirst, but after that closes, I imagine you're going to be looking for more acquisitions outside the Uniform business. So just any thoughts on what might be next for you after that point and maybe how you're thinking about the consolidation opportunity in the fire business would be interesting.

Got it. Thanks for taking the questions guys.

And our next question comes from Andrew Steinerman from JP Morgan Securities. Please go ahead Andrew.

Hi this is Alex Hess on for Andrew Steinerman. Good morning everyone. Want to touch on a couple recent initiatives you have. First is the recently announced three-way contracts with you guys, Ford and Carhartt. And the second being the launch of what I think is a new personalized Apparel Plus program on your website. Both of those seem to be targeting the trades and manufacturing a bit more. Just wanted to maybe start. Is there something you're seeing in those goods providing industries that maybe you're leaning into those a little more for sales growth in near term?

Yeah, I'll add a little color there, Alex. And I appreciate the question. And you know, Apparel Plus really goes back to the core of our company culture and values, which is a culture of innovation and continuing to be dynamic and move to where the opportunity is and where the opportunities will present themselves in the future. And so Apparel Plus is just another movement towards that. So we want to be able to outfit any job manageable across North America. We want to make sure that we have the right apparel in those industries for what people want to wear, what they choose to go to work in and it's been very successful for us. Regarding especially trades, I think Todd outlined the fact that that market is really a large employment market. They resonate well with our value proposition. And there's a tremendous amount of opportunity. In fact, I have an example of one that I brought here for a call today. And as we always speak about, two-thirds of our new customers come from the unserved market and we always want to illustrate what does that look like? Why do customers continue to partner up with Cintas? And what do they see as a main driver of the value proposition? So I have a property maintenance example here. And this company was going ahead and they were buying uniforms for their employees, a combination of retail and e-commerce with the primary objective that they wanted to look professional and they wanted to look good and cohesive in front of their customer base. But what they found out over time was that they weren't able to accomplish that objective. As they bought year after year, the styles would change. They would be inconsistent on an annual basis. What employees determined was clean and what represented the company well varied depending on the individual employee. The management team was spending a bunch of time administering the program, in ordering, in size changes and anytime things were worn out. So it took them a bunch of time and then of course budgeting was all over the place. Sometimes they had big spikes in budgets, other times they had very little, made it really hard for them to manage their P&L. When they were introduced to the fully managed rental program for Cintas, they saw all the things that they wanted out of the program. They were able to get higher quality uniforms that were very comfortable that were branded with specifically the Carhartt name, things that their employees really wanted to wear. They got a nice consistent image across the board because all their employees were wearing exactly the same thing and they were in good and usable and presentable conditions because of our professional laundry service that was provided with them. They were able to get time back in their day because they were no longer in a uniform business. They were in the business of taking care of their customers which they certainly appreciated and it made budgeting a whole lot easier. So, that's exactly why we want to continue to expand the product line to be able to show other industries the benefits here of a rental program, and why we think that we have such a massive market opportunity.

Got it. That's awesome, guys. And then maybe as a follow-up, obviously you guys are in the midst of implementing SAP into the fire segment and you guys have implemented SAP into a host of acquisitions over the years. Maybe you can just highlight, you know, one on fire the progress and perspective benefits, but also just sort of learnings from running that ERP implementation successfully over the years and what that you might be able to do with that going forward.

Thank you.

And our next question comes from Jason Haas from Wells Fargo. Please go ahead Jason.

Good morning. This is Jin on for Jason Haas. Thanks for taking our questions. Can you walk us through some of the key puts and takes to consider for 4Q organic revenue growth by segment? I believe you guys had some one-time benefits in 4Q last year in uniform direct and first aid and safety. Could you remind us how big those impacts were and any other factors to consider across the board? Thank you.

Yeah, Todd, I might just add like first off, I just say, you know, we had an outstanding quarter this quarter. You know, Jim mentioned that we continue to execute at a high level. We feel that the guide for Q4 is not only a good guide, but it's also consistent with the guide that we gave at the end of the second quarter. And I guess let me kind of walk through a little bit of math there that you know last quarter the organic growth at the high end of the range was 8% and if you look at the guide for this quarter, this quarter is also at 8%. And then if you even take it a step further and look at it another way, last quarter we issued a guide for the second half of the year to grow organically 7.8% to 8%. In Q3 we just delivered a growth rate of 8.2% organically and when you combine that with the Q4 implied of 7.6, you get an average of 7.9. So really effectively right in line with the guide that we gave last quarter.

Great. That's really helpful. And as my follow-up, I understand that most of your new business comes from non-programmers, but I want to see if you've seen any change in the competitive environment recently following your acquisition and also given changes in the macro and geopolitical environment.

And our next question comes from Ashish Sabadra from RBC. Please go ahead Ashish.

Hey good morning guys. This is Willi on for Ashish Sabadra. Appreciate you guys taking our question. Basically what I want to ask on route density and the incremental opportunities there around footprint especially with UniFirst acquisition in mind with retention still at highs will any retention dips result in kind of reorganization there or do you still see a lot of opportunity kind of increasing the sell-through on those routes and just further fleet optimization?

I'll, why don't I start on that one and then I'll see if anybody else wants to add color. I think Ashish, you all are probably aware of our smart truck technology and how we approach routing and routing efficiency and the first thing that we try to do with routing and routing efficiency is be as little disruption as possible. Whether that's within our own facilities or when we make an acquisition. And especially when we make acquisitions, we recognize that the most important component of the acquisition and the customers and the new employees that we brought on board. And we try to be as little disruption as possible to those two constituents. And we spent a lot of time, you know, trying to win over hearts and minds and build trust. And then we implement our smart truck technology and smart truck allows us to make incremental moves and to gain efficiency over time rather than a wholesale route consolidation all at one point. We don't like doing that. We don't like big route reorganizations within a facility at one point because it could be highly disruptive. So we love the smart truck technology. It's been effective for us over the last several years. Has been one of the contributors to continuing to elevate our gross margin and that would be our approach with any future acquisitions.

Okay. And our next question comes from Faiza Awi from Deutsche Bank. Please go ahead Faiza.

Yes. Hi, thank you. Good morning. I wanted to see if you've gotten any feedback from any of your larger customers around the announced acquisition of UniFirst. And really related to that, I'm wondering if we should be expecting any type of dis-synergies when you initially make the, when the acquisition is completed.

Great. Thank you. And then just to follow up on that, I'm curious if you're doing anything differently kind of in terms of managing the business or in timing of investments, things like that up until the acquisition and if that's going to be a factor in terms of how we should think about incremental margins in the near term. I see the implied kind of 4Q guide but just curious if you're just managing things a little bit differently.

Great. Thank you so much.

And our next question comes from Connor Siglia from AllianceBernstein. Please go ahead Connor.

Great. Thanks so much. I wanted to follow up on employment trends you've been seeing and get an update versus last quarter. Are you seeing any changes in the conversion cycle or win rate for first-time buyers? And within that, specific verticals, call it healthcare or education, are they proving more resilient? And which areas are you seeing more weakness?

Great. That's it for me and I'll pass it on. Thank you.

And our next question comes from Seth Weber from BNP Paribas. Please go ahead Seth.

Hi, good morning guys. Just a quick one for me just on the fire ERP implementation. I think we had previously talked about like a 100 basis points margin headwind next year for 27. I just wanted to sort of mark to market and see where we're at from an expense perspective if that's still the right way to think about it. Thank you. Just 100 pips for this segment. Thank you.

Yeah. This is Scott. Thanks for the question. You know, as Todd mentioned, some of the impact on next year's on the segment is going to be dependent on the roll out in the fire business. We're satisfied with our progress today. Still not clear on exactly when next fiscal year that'll be fully rolled out but the progress is good. If you looked at an entire year, it would be the 100 basis points that you referenced. Then depending on when we actually go live with the entire business, it will be something less than that because we're not anticipating us being fully rolled out by June 1st.

Got it. Okay, that's helpful. Thank you guys. That's all I have.

And with that, we need to end our Q&A session for today. I'd like to turn the call back over to Jared for closing remarks.

Thank you, Ross, and thank you for joining us this morning. We will issue our fourth quarter of fiscal 2026 financial results in July. We look forward to speaking with you again at that time.