Survey Portrays Brighter Uniform Rental Picture

MILWAUKEE, March 21—Continued uniform rental sales momentum characterized the first quarter 2011 Robert W. Baird & Co. survey of independent operators in this segment of the textile services industry. The Milwaukee-based investment analyst sees possible “incremental improvement” on the way thanks to the stronger U.S. economy. One caveat: rising cost pressures from recent commodity inflation.

Baird noted further improvement in its Add/Stop diffusion index, which measures expansion/contraction at existing accounts. This figure reached 66.7 (50 implies growth), the second consecutive positive reading above 60, consistent with the slight boost in U.S. employment.

Forward growth expectations are improving as well, with respondents foreseeing a 4.6 percent increase over the next 12 months, suggesting further improvement versus December and well above year-ago levels (see bar graph). This forecast is better than Baird’s current estimates for the three public uniform rental companies: Cintas Corp., Cincinnati (4.1), UniFirst Corp., Boston (4.3) and G&K Services, Inc., Minneapolis (2.9).

No-programmer interest is at highest level since December 2007. The market for new customers continues to improve, with the Baird index of this metric at 60.7 in March, its highest level in more than three years, echoing commentary from the public companies on new account sales.

The Baird survey, conducted quarterly since 2003, is meant to gauge the sentiment of industry insiders and the key industry drivers affecting the uniform market. Respondents are senior executives from private uniform rental companies located throughout the United States. These companies mimic the national coverage and size of the public companies and offer anecdotal insight into emerging industry trends. The first quarter survey generated responses from 42 independents, representing an annual revenue pool and geographic distribution roughly equal to that of the public uniform rental companies.

Baird’s analysis of U.S. Department of Labor reports found uniform rental-related employment nationwide posting its strongest gain in four years (since March 2007): up 88,000 in February, well above the gain of roughly 24,000 per month level seen thus far in the economic growth cycle started in 2009, “providing the first glimmer of more meaningful recovery.” Year-over-year improvement in uniform-wearing employment has only just recently turned positive, with February gains more consistent with mid-cycle levels.

More than 98 percent of respondents expect growth rates to either remain flat or improve in 2011-2012.  Several respondents, particularly those with “higher healthcare linens exposure,” expect growth rates in excess of 9 percent. “Expectations appear reasonably set, potentially conservative,” Baird said, as industry revenue was above expectations in 1Q11. In addition, more respondents noted better-than-expected performance (41 percent) than results below expectations (12 percent), suggesting potential conservatism in near-term outlooks.

“We believe an increasing number of respondents exceeding internal budgets underscores the employment improvement we have seen in recent months and is a key reason why we are becoming more positive on the stocks,” Baird said.

Rising commodity price pressure remains respondents' largest incremental concern. Baird indicated it would “continue to monitor recent cotton and energy price movements to gauge potential margin impact.” Some pressure will be offset by more robust top-line growth, as incremental wearer additions at existing accounts are typically quite profitable.

Companies with a higher percentage of linen business likely will feel this pressure more, the firm theorized, as flatwork items tend to have higher cotton content than industrial garments.