VSTS Q1 Earnings Call: Revenue Miss, Service Challenges, and Leadership Transition Shape Outlook
Uniform rental provider Vestis Corporation (NYSE:VSTS) fell short of the market's revenue expectations in Q1 CY2025, with sales falling 5.7% year on year to $665.2 million. On the other hand, the company expects next quarter's revenue to be around $678 million, close to analysts' estimates. Its non-GAAP loss of $0.05 per share was significantly below analysts' consensus estimates.
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Revenue: $665.2 million vs analyst estimates of $693 million (5.7% year-on-year decline, 4% miss)
Adjusted EPS: -$0.05 vs analyst estimates of $0.15 (significant miss)
Adjusted EBITDA: $47.62 million vs analyst estimates of $83.07 million (7.2% margin, 42.7% miss)
Revenue Guidance for Q2 CY2025 is $678 million at the midpoint, roughly in line with what analysts were expecting
EBITDA guidance for Q2 CY2025 is $63 million at the midpoint, below analyst estimates of $89.75 million
Operating Margin: -1.3%, down from 6.1% in the same quarter last year
Free Cash Flow was -$6.85 million, down from $63.16 million in the same quarter last year
Market Capitalization: $814.4 million
Vestis Corporation's first quarter results reflected operational challenges stemming from volume declines and ongoing customer service issues, as discussed by interim CEO Phillip Holloman. The company faced revenue headwinds as rental sales fell short of expectations, primarily due to lower demand from hospitality customers post-holiday and a drop in billings for lost or ruined inventory. Management also cited seasonal factors and continuing service-related credits as key contributors to underperformance.
Looking ahead, Vestis leadership shifted to providing only quarterly guidance, citing both the need to realign internal forecasting and external macroeconomic uncertainty. The company expects slight sequential revenue improvement, but margins are projected to remain pressured. Holloman emphasized ongoing investments in customer service and operational efficiency, while incoming CEO Jim Barber's leadership transition is expected to influence future strategy and execution. CFO Kelly Janzen noted, 'We are encouraged by recent trends,' but acknowledged the need for continued improvements in retention and service delivery.
Vestis management attributed the latest quarter's shortfall to internal operational issues and seasonal demand factors, while highlighting steps underway to stabilize performance and support future growth.
Leadership transition announced: Former UPS COO Jim Barber was appointed as the incoming CEO, effective June 2025, signaling a shift in leadership focus.
Customer service focus: Management acknowledged that service deficiencies, such as product shortages and cleaning quality, drove increased credits issued to customers, adversely affecting revenue.
Sales team ramp-up: The frontline sales organization is now fully staffed, with productivity per sales representative rising 10% over the quarter, supporting improved new business wins.
Lost versus new business: Although lost business still exceeded new wins, the gap narrowed by about 10% quarter-over-quarter, and new customer installations rose 35% year-over-year.
Operational changes and cost control: The company continued plant consolidations and asset utilization initiatives, while emphasizing the need to balance cost reductions with investments to retain customers and enhance service.
Management's outlook for the next quarter is shaped by ongoing investments in service and sales capacity, tempered by the need to address persistent cost pressures and internal execution risks.
Customer retention improvements: The company is prioritizing service enhancements and operational reliability to reduce customer churn, which management believes is essential for stabilizing revenue.
Margin recovery efforts: Efforts to improve gross margin include stricter control over service credits, optimization of facility operations, and reduced discretionary spending.
CEO transition impact: The incoming CEO is expected to evaluate further strategic and operational changes, potentially increasing investment to drive a turnaround in customer service and sales effectiveness.
Andy Wittmann (Baird): Asked about management's confidence that this quarter marks the bottom and whether operational service issues are being resolved. Management cited improving monthly revenue trends but acknowledged the need for sustained progress.
Shlomo Rosenbaum (Stifel): Inquired about the duration and required investment of the cultural transformation to address recurring service issues. Leadership described a renewed focus on accountability and customer-centric operations, but emphasized it will take time.
Luke McFadden (William Blair): Sought clarity on when new business is expected to exceed lost business. The company expressed optimism, citing increased sales team productivity but did not provide a specific timeline.
Ronan Kennedy (Barclays): Asked whether revenue declines and suspended guidance were due to internal factors or broader market trends. Management confirmed most issues were internal, especially related to customer retention and service.
Stephanie Moore (Jefferies): Requested details on how Vestis differentiates itself to win new customers given recent service challenges. Management highlighted that 56% of new wins came from competitors and pointed to new service tools and processes.
In the upcoming quarters, the StockStory team will monitor (1) whether service initiatives succeed in reducing customer churn and credits, (2) the impact of the CEO transition on operational strategy and execution, and (3) the ability of the fully staffed sales team to convert increased pipeline activity into sustained revenue growth. Improvements in free cash flow and margin stabilization will also be key areas of focus.
Vestis currently trades at a forward P/E ratio of 7.8×. Should you double down or take your chips? See for yourself in our free research report.
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