Cintas' Earnings Lag Estimates


Cintas Corporation (CTAS) reported relatively modest fiscal 2013 third-quarter (ended Feb 28, 2013) results with net income of $74.7 million or 60 cents per share compared with $76.0 million or 58 cents per share in the year-earlier quarter. Although earnings per share for the reported quarter increased year over year, it missed the Zacks Consensus Estimate by a couple of cents.

Operational Update

Total quarterly revenue increased 6.3% year over year to $1.08 billion, marginally ahead of the Zacks Consensus Estimate of $1.06 billion. Taking in to account the effect of one less workday in the reported quarter compared with the previous year, total revenue increased 7.9%. The record top-line performance was primarily attributable to strong Uniform Direct Sales.

Organic growth (adjusted for acquisitions and the impact of one less workday) was 6.9% with strong execution by the global accounts and supply chain teams. However, the dearth of any meaningful customer hiring resulted in increased rental material cost and capacity pressure on routes, owing to which rental segment material costs exceeded year over year. Consequently, operating income for the quarter dipped 3.3% to $133.0 million.

Segment Performance

Rental Uniforms and Ancillary Products revenues for the quarter improved 3.9% year over year to $748.9 million, accounting for 70% of the total company revenue. Gross margin decreased 120 bps compared with the year-ago quarter to 41.9% due to the adverse effect of one less workday and higher material and service costs associated with added route capacity.

Uniform Direct Sales revenues totaled $126.1 million, up 15.6% year over year and accounted for 12% of the company’s revenues. Gross margin contracted 130 bps to 29.2% due to changes in product mix.

First Aid, Safety and Fire Protection Services revenues climbed 11.3% to $112.9 million, representing 10% of the company’s total revenue. Gross margin improved 80 bps year over year to 44.0% due to the continued efficiency gain by a relatively strong performance in the segment.

Document Management Services revenues increased 8.9% year over year to $87.8 million and accounted for 8% of the total company revenue, with higher average recycled paper price of $140 per ton vis-à-vis $135 per ton in the prior-year quarter. Gross margin remained comparatively flat at 47.1%.

Financial Position

Cash and cash equivalents were $217. 5 million at quarter end, while long-term debt was $1.31 billion. Cash flow from operations was $368.3 million during the first nine months of fiscal 2013, representing a 19.7% increase from the comparable period in the previous fiscal. Cash from operating activities in the reported quarter was $141 million, compared with $132 million in the year-ago quarter.

Revised Fiscal Outlook

Cintas raised its revenue guidance for fiscal 2013 in the range of $4.3 billion–$4.325 billion from its earlier guidance of $4.275–$4.325 billion. The company also raised its earnings guidance to $2.50–$2.54 per share from its earlier projection of $2.50–$2.58.

Moving Forward

Cintas continues to deliver organic growth through superior execution of its operational plans. The company witnessed top-line growth across all the segments in the reported quarter and expects to continue this bull run in the fourth quarter as well. We also remain encouraged with the relatively strong performance of the company.

However, Cintas should remain wary of stiff competition from rivals such as G&K Services Inc. (GK), UniFirst Corp. (UNF), and ABM Industries Incorporated (ABM). Cintas presently has a Zacks Rank #2 (Buy).

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