TRSA recently hosted a webinar for its members that focused on the findings of Andrew Wittmann and Justin Hauke, Robert W. Baird & Co financial analysts specializing in the performance of linen, uniform and facility services Company specializes. The couple discussed the ongoing impact of Covid-19 on the industry while analyzing employment data and market trends. The content of the virtual event is given below based on the original TRSA reporting.
In a one-hour TRSA webinar on July 8, Wittmann and Hauke began their presentation with an update on the financial markets. They used measures such as the US dollar, the S&P 500, the US Treasury Department's yield curve, and the Federal Reserve's balance sheet to measure the health of financial markets and describe recent trends in each of these areas.
It found that the US dollar had weakened in June, mainly because the US fared poorly against other developed countries during Covid-19. The S&P 500 index shows that the stock market has almost completely recovered to its pre-Covid state. The yield curve for government bonds has returned to normal as a result of the Federal Reserve's cut in short-term interest rates.
Wittmann and Hauke assume that interest rates will remain low for the foreseeable future. In addition to the rate cut, the Fed bought bonds from the Treasury Department to fund the CARES bill (a major stimulus funding bill). The Federal Reserve's balance sheet has skyrocketed in the wake of the pandemic.
The US economy officially entered recession in March and April as determined by the Economic Advisory Board, and it is uncertain whether we are still in recession or not. The shelter-in-place orders and other shutdown measures taken earlier this year delivered an unprecedented shock to the economy. The sharp decline in personal consumption, typically around 70% of GDP, was the main contributor to the downturn. More recently, retail sales growth has rebounded due to online sales.
A combination of reopenings and economic benefits has resulted in a surge in consumer spending, raising concerns that retail sales may decline once economic resources run out.
In addition to reviewing consumer trends, Wittmann and Hauke evaluated other economic indicators, including residential property, mortgage defaults, inflation and unemployment. Non-residential construction has also slowed, but residential construction has done well for both new and existing homes. Property sales are rebounding due to pent-up demand coupled with low mortgage rates. Banks are concerned about a possible increase in mortgage defaults due to the high unemployment rate. The Coronavirus Aid, Relief and Economic Security (CARES) law has temporarily protected borrowers, but up to 30% of Americans with home loans (15 million households) are at risk of not paying their mortgages. While energy and raw material prices have fallen, consumer prices for many consumables, especially food, have increased. However, most of the inflation remains in the financial markets.
The industrial economy had already weakened before Covid's slowdown; The purchasing managers index for the manufacturing sector (PMI) has been in negative territory since August 2019. Industrial production is now in a deep decline.
The coronavirus pandemic led to an increase in the unemployment rate. Unemployment has fallen slightly since its peak and has stabilized, but remains at a high level. It reached a high of 14.7% in April and is currently 11.1% (June). Labor trends in the textile markets (including the linen, uniform and facility services markets) reflect similar trends as in the national labor market, with the hospitality sector being particularly hard hit.
Wittmann and Hauke's analysis also included reviews of the performance of Cintas, Unifirst and Aramark. Although the single sector stock performance lagged relative to the broader market, stock prices have rebounded. Cintas released a business update in May. Your profit expectations are down 25%. Direct sales fell by around 50%, old-age rental income and income from fire protection and security in the mid-single-digit range. Due to the demand for personal protective equipment (PPE), first aid sales increased by 9%. Free cash flow has developed positively throughout the entire Covid-19 crisis.
With Aramark, wage cuts, vacation days, and layoffs have capped decremental margins to around 20%. Sales in the grocery store, which is a large part of Aramark's business, are down 50%.
Unifirst's weekly sales in April had declined in mid-teens. Now it's in the mid-single digits. Unifirst's pace of reopening and restoration has recently stalled. They had high PPE and Covid-related compliance costs, so margins should improve as many Covid-related burdens ease up.
Baird regularly conducts uniform surveys in the rental and laundry rental industry. The results of the quarterly survey on the uniform rental industry from June 2020 document a sharp decline. The add / stop index, which represents the employment-related expansion on existing accounts, fell dramatically. 70% of respondents' earnings fell short of expectations, 15% met their sales targets, and 15% exceeded them. New customer interest has declined for the first time in years. The prices for new accounts have remained relatively stable, while the prices for basic accounts (existing) have decreased. Overall, the survey participants expect moderate growth (1.4%) for the next year, but the results vary widely. This forecast varies based on reopening and customer viability.
According to the linen rental survey, 89% of the respondents' rental income was well below expectations. Six percent of respondents met expectations and six percent exceeded them. When it comes to pricing for new accounts, 17% of respondents said pricing was more aggressive, 22% said pricing was less aggressive, and 61% saw no change. The prices for basic accounts fell from + 1.74% to + 0.5%. Thirty-three percent of those surveyed indicated price increases; 50% reported no change and 17% saw a contraction. For the next year, an average decline in sales of 4.2% is expected. 40% of those surveyed expect a decline in sales of more than 10%.
LCNi thanks TRSA for using the above content.