Automation And Remote Work Will Erode US Commercial Services Demand And Raise Operating Risks

Key Takeaways

• Automation, remote work trends, and internal execution issues are driving structural challenges that threaten long-term revenue, customer retention, and earnings consistency.
  
• Increased regulatory costs and capital constraints limit flexibility, elevating risk if anticipated margin and growth improvements fail to occur.
  
• Strong sales execution, customer retention, and operational improvements are driving revenue stability, margin gains, and supporting future growth with maintained financial flexibility.

Catalysts

Provides uniform rentals and workplace supplies in the United States and Canada.

• Ongoing automation and robotics adoption in Vestis' core customer industries may permanently reduce demand for uniform and facility services, leading to long-term structural revenue declines regardless of targeted sales efforts or new business wins.
  
• A sustained shift to remote and hybrid work models reduces the need for workplace uniforms and facility management, placing continued downward pressure on Vestis' addressable market and undermining both revenue growth and customer retention.
  
• Higher environmental compliance and regulatory mandates may force Vestis to make significant capital outlays to meet new standards while facing rising textile waste and emissions pressures, resulting in elevated operating costs and margin contraction over the long term.
  
• Persistent internal operational issues, including repeated service failures, customer credits, and the ongoing need for cultural transformation, signal an inability to consistently execute at scale, risking further lost business, suppression of net margins, and unreliable earnings visibility.
  
• Elevated leverage following recent amendments to debt agreements, combined with the suspension of dividends and share buybacks through at least 2027, limits capital allocation options and pressures free cash flow, leaving Vestis exposed if revenue growth and margin recovery do not materialize.

Vestis Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Vestis compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Vestis's revenue will grow by 1.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.9% today to 2.6% in 3 years time.
• The bearish analysts expect earnings to reach $73.2 million (and earnings per share of $0.54) by about July 2028, up from $-24.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, up from -35.3x today. This future PE is lower than the current PE for the US Commercial Services industry at 25.5x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.39%, as per the Simply Wall St company report.

Vestis Future Earnings Per Share Growth

Risks

• Demand for Vestis' core uniform and workplace supply services appears resilient, as evidenced by steady improvement in monthly revenue trends, strong performance in both frontline and national sales, and no signs of a broader industry or macroeconomic slowdown-suggesting top-line revenue can stabilize and recover over time.
  
• New business sales installations grew 35% year-over-year and 10% quarter-over-quarter, and the company's salesforce is now fully staffed with higher productivity per rep, which positions Vestis to offset customer churn and drive higher recurring revenue in the coming quarters.
  
• Customer retention is solid with a rolling 12-month retention rate of 92.4%, consistent with historical levels, while management reports a narrowing gap between lost and new business, indicating that net customer losses may soon reverse and begin contributing positively to revenue stability and growth.
  
• Strategic operational improvements-including reductions in customer credits through better service and inventory management, and investments in employee training-have already resulted in sequential growth in field sales and reduced revenue leakage, which are likely to improve both revenue and net margins moving forward.
  
• The business is maintaining strong financial flexibility, having recently amended its credit agreement to secure additional breathing room on leverage covenants, reduced total debt by over $300 million since 2023, and demonstrated available liquidity near $300 million, reducing balance sheet risk and supporting continued investment in growth and deleveraging which will benefit future earnings.

Valuation

• The assumed bearish price target for Vestis is $5.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Vestis's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.0, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $73.2 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 9.4%.
• Given the current share price of $6.5, the bearish analyst price target of $5.0 is 30.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.