UniFirst Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

UniFirst Corporation is a leading provider of workplace uniforms and protective clothing, primarily serving the U.S. and Canadian markets. The company provides rental, uniform and related services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

UniFirst Corporation (UNF) is a company that provides uniform rental and related services. They also do direct sale of workwear and protective equipment. They operate facilities in the US, Canada, and Europe, providing services to various industries, ranging from manufacturing, healthcare, and service facilities.

Key aspects of their operations include manufacturing, renting, laundering, repairing, and delivering a wide variety of uniform and work apparel to its customers.

Revenue Distribution

  • The company segments its revenues into the following:
    • US and Canadian Rental and Cleaning: This segment forms the majority of UniFirst’s revenues, consisting of rental services for uniforms and protective clothing, as well as related services, delivered mostly to U.S and Canadian customers.
    • MFG: This unit produces textiles and various products for their different divisions.
    • Specialty Garments: This segment sells specialized high-visibility clothing for the energy, cleanroom, and other industries.
    • First Aid: They distribute medical and first aid equipment and products to a wide variety of customers.
    • All other revenue segments comprise their smaller divisions.
  • The majority of UNF’s revenues are derived from their U.S. and Canada Rental and Cleaning segment. It represents 88.5% of the total revenue for the fiscal year ended August 2022.
  • The company offers both rental programs, where they provide, clean and maintain the uniforms for clients. They also offer outright sales.
  • The textile rental market is relatively stable, with demand largely driven by employment levels and the need for uniform compliance within various industries.
  • The industry exhibits a certain level of maturity, implying a focus on maintaining market share and efficiency, rather than high growth.
  • There’s a growing focus on sustainability and environmentally friendly practices by businesses, which have to make their businesses more responsible.
  • Digitization and technological advances are transforming the way how they operate and the way they interact with customers.

Competitive Landscape

  • The uniform rental market is competitive, with both local and national players. The largest players in the industry are Cintas, Aramark, and UniFirst.
  • While the company has a notable presence, especially in the US and Canada, it is not considered a market dominator, or leader as they do not have a very high market share compared to the two giants of the industry.
  • Competition is based on price, service quality, and reliability, with an important factor being geographical reach.
  • The company is not known to have developed any special brand power, and it doesn’t have any exclusive contracts, or any moat.
  • The switching costs for clients of these companies are reasonably low, since the contracts are generally short-term in nature and many companies offer the same services, with not much to choose from.

What Makes UniFirst Different

  • A big differentiator for UniFirst is its “local presence” model. This method focuses on the personal relationship that local representatives are able to make with each of their customers.
  • This method, they claim, makes the company have a great relationship with their employees and clients, which allows better service quality.
  • They have a robust vertically-integrated system that has their production facilities, which, therefore reduces production costs, and provides the company with more control over their supply chain.
  • They offer various service programs and products that cover all needs of their customers.

Financials

All figures are given in millions of USD unless specified.

  • Revenue: UNF shows a positive trajectory for their revenue with an increase from $1,989 in 2020 to $2,277 in 2022 and $2,427 in 2023. Their revenue seems to have stabilized in the last couple of years as seen by 2023 revenue being only 2% higher than the 2022 one.
  • Operating Income: The company shows some volatility in its operating profit. In 2020, they had a figure of 171, in 2021 it jumped to 239, and then to 172 in 2022. This shows that the company hasn’t been able to show a steady profitability during the last 4 years. In 2023, they had a major jump in income to $246.

  • Net Income: Similarly to operating income, Net income was at 43 million in 2020, 108 million in 2021 and at $69 million in 2022. In 2023, the net income rose significantly to $133 million. This shows how the company is experiencing a volatile income growth, which can deter investors.

  • Margins: The company’s operating profit margin has varied from about 8.6% in 2020, up to 11% in 2021 then back down to 7.6% in 2022. It jumped again to 10.4% in 2023. Such large variations make future revenue predictions complicated.

  • Return on Invested Capital (ROIC): ROIC has ranged from roughly 10 to 12%, as it was approximately 12% in 2021, 11% in 2022 and it was roughly around 11% in the recent quarter ending May 2023. This means that the company can create revenue in excess of its cost of capital, and it is therefore a value-creating business.

  • Balance Sheet:
    • Total assets: $2,269.1 in August 2023.
  • Total liabilities: $1,201 in August 2023.
    • The company has maintained a healthy leverage ratio, which indicates an appropriate balance between the company’s debt and equity. It indicates that most of the assets were financed by company profits, rather than new debt issuance.
  • Cash Flow: The company has a positive Free Cash Flow (FCF). In August 2023, its net cash provided by operating activities is $226 million.

  • The company had a large jump in FCF at the end of 2022, due to large declines in inventories and receivables. These declines seem to be due to the company becoming more focused on efficiency and cutting out unnecessary assets.

  • Debt: Total long term debt at August 2023: $334.7 million.
  • Shareholder Equity: Total shareholder equity at August 2023: $1,067 million.

Moat Rating: 2 / 5

The economic moat is the ability of a business to protect its competitive advantages over its competitors.

Based on our analysis, UniFirst has a narrow moat, as there are certain aspects of the business that protect it from fierce competition, but it doesn’t have any strong advantages.

  • Local Presence and Long-Lasting Client Relationships: The company seems to have a very personal approach to its clients, which in some cases may bring client loyalty. This is not a strong differentiator, as competitors can do the same and is not based on hard-to-copy assets.
  • Vertical Integration: The company operates its own manufacturing facilities that lower its operating expenses and provides some competitive advantages. However, competitors can do the same, and there are lots of companies with low costs. These advantages are easily replicable, as the business is not very unique.
  • Financial Strength: A strong balance sheet is also a good indication that the business is managed well and has some advantages compared to companies that are overly leveraged.

However, the following points show why its moat is not strong:

  • Switching costs: There are low-to-medium switching costs for customers who can easily change suppliers.
  • No Product Differentiation: Uniforms are not special or hard to copy. That doesn’t offer the company a big advantage compared to other uniform suppliers. - Pricing pressures They operate in a competitive industry and are susceptible to aggressive price competition from other similar businesses.

Overall, based on all factors described, UniFirst doesn’t have any unique or defensible characteristics that give the company long lasting advantages and therefore they don’t have a wide moat.

Business Understandability: 3/5

  • The business of renting and selling uniforms is relatively straightforward and not very difficult to understand.
  • However, the complexities of its full operations, which involve production, maintenance, and customer contracts, require a deeper understanding.
  • They have various different business segments, and this makes fully understanding their business model less straightforward than for a single-segment company.
  • There’s some complexity in analyzing the impact of their financial structure and their various contracts, and the industry changes and competitive dynamics.

Balance Sheet Health: 4/5

  • The company has an appropriate financial leverage, as its debt isn’t too high.
  • Their consistent profits give an indication that they can honor all debt payments.
  • Their cash flow is healthy and consistently produces cash, indicating a strong financial position. They also have a large cash cushion that is available for further investments and growth.
  • While there’s nothing particularly worrying about their balance sheet, they also have few significant strengths, hence our rating of 4/5.

Risks to the Moat and Business Resilience 

*   **Competition:** Intense competition from larger and equally well-established players can cause a reduction in their overall revenues and profit margins, as these big players could have a better negotiation power.
* **Changing consumer needs:** Changing consumer needs are a big threat for the company as if they dont innovate and offer products in line with the changes, they may lose their existing customers. This was also highlighted by the company's CEO in the latest earnings call, as the company is looking to keep its business sustainable for the future.    *   **Economic Downturns:** As the economy slows down, the revenues can easily shrink, and clients can also decrease spending on unnessecary goods.
* **High inflation:** High inflation, that the company is facing right now, can significantly increase costs. Although they have a flexible pricing system, it may be difficult for the company to translate all price increases to its customers, which will then reduce profits.
*  **Technological Disruption**: If a technological disruption was to come up in this sector, the current infrastructure will become obsolete quickly, thus eroding their competitive advantages.
* **Operational Risks:** Any disruption in the supply chain of products that they sell or use to produce, or any negative events such as disasters can severely harm the company's revenues.

Conclusion

UniFirst is a well-established company in its sector and has a pretty stable financial history. It does not have any strong, hard to copy advantages, hence a narrow moat rating of 2/5. Because they have a wide variety of segments and some complicated accounting practices, the company also receives a understandability rating of 3/5. However, they are financially very healthy, hence a balance sheet rating of 4/5. As there are no strong advantages, the company has to focus on improving its processes and its strategy to create long-lasting value. As seen by the latest reports and earnings calls, the management is taking the steps for this purpose.