Sales Productivity Gains And Cost Savings Will Drive Future Success

Key Takeaways

• Enhanced field sales productivity and national account wins are expected to drive volume growth, surpassing lost business and boosting revenue.
  
• Cost-saving initiatives like merchandise reuse and logistics optimization are anticipated to improve net margins and EBITDA.
  
• Vestis faces challenges in revenue growth, profitability, and financial stability due to currency fluctuations, efficiency reliance, and high leverage.

Catalysts

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

• Vestis anticipates new volume growth to surpass lost business by the end of Q2, driven by increased field sales productivity, national account wins, and new frontline sales headcount growth, which is expected to boost revenue.
  
• Price increases commenced in Q1 and are set to continue throughout the year, projected to positively impact net margins by helping maintain or increase profitability.
  
• Significant cost savings are expected from operational efficiencies, including merchandise reuse programs and logistics optimization initiatives, which are foreseen to improve net margins and EBITDA.
  
• Optimization of workforce and structural profitability, including rationalization of build operations and back office G&A, is expected to enhance net margins in future quarters.
  
• The ramp-up in sales force hiring, alongside improved customer retention metrics (92.9% retention rate), is anticipated to support revenue growth for the remainder of FY '25.

Vestis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vestis's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.3% today to 4.1% in 3 years time.
• Analysts expect earnings to reach $126.6 million (and earnings per share of $0.94) by about March 2028, up from $9.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.5x on those 2028 earnings, down from 149.8x today. This future PE is lower than the current PE for the US Commercial Services industry at 29.8x.
• Analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.63%, as per the Simply Wall St company report.

Vestis Future Earnings Per Share Growth

Risks

• There was a decline in quarter-over-quarter revenue, with Q1 revenue down 4.7% compared to the prior year and down 2.8% on a normalized constant currency basis, indicating ongoing challenges in maintaining revenue growth.
  
• The company's exposure to exchange rate fluctuations impacted results, as illustrated by the unfavorable movement in the Canadian dollar which negatively affected revenues. This adds a risk factor that could impact future earnings.
  
• The adjusted EBITDA margin was 11.9% in Q1, down 180 basis points year-over-year, which suggests potential difficulties in maintaining profitability and efficiency relative to prior periods.
  
• There is a reliance on cost savings and operating efficiency improvements to drive EBITDA growth, which may not be sustainable if these initiatives do not continue to deliver as expected, potentially impacting net margins.
  
• Vestis has a high leverage ratio, with net debt at $1.27 billion and a net debt-to-EBITDA ratio of 3.8x, which could pressure the company's financial stability and flexibility, affecting earnings and investment capacity.

Valuation

• The analysts have a consensus price target of $15.3 for Vestis based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.0, and the most bearish reporting a price target of just $13.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.1 billion, earnings will come to $126.6 million, and it would be trading on a PE ratio of 20.5x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $10.84, the analyst price target of $15.3 is 29.2% higher.
  
• 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.