UniFirst (NYSE: UNF) is a quality business with savvy management working hard to improve shareholder value. The efforts include upgrading technology to the latest in enterprise resource planning (ERP) and customer relationship management (CRM) software, helping drive margin. While headwinds persist, they are diminishing and have the company set up to leverage its earnings growth as it scales. Today, the company’s operations sustain self-funded growth, a fortress balance sheet, dividends, and share repurchases. At face value, the company is reminiscent of the early days of larger competitor Cintas (NASDAQ: CTAS), which grew its share price by 800% in the last ten years and is now a Dividend King. 

UniFirst Signals Wider Margin Improved Profitability 

UniFirst’s Q3 results are much better than expected, with strength centered on the margin. The company reported $603.3 million in revenue for a gain of 4.6%, slightly ahead of the consensus estimate, with margins significantly wider. Revenue was driven by a 5.3% gain in the core laundry segment, offset by a slight decline in the Specialty segment. The mitigating details include seasonality in the specialty segment and the impact of CRM and ERP on the core business. 

The company reported a 320 basis point improvement in core laundry operating margin and a 280 bps improvement in operating margin. That and the reduced impact of CAPEX spending relating to the ERP and CRM software resulted in double-digit increases in income and earnings. Operating income increased by 45% to $48.5 million, net income increased by 56.8%, and EBITDA by 29%. The net result is a 58% increase in diluted GAAP earnings, which outpaced the consensus reported by MarketBeat by $0.33.

News aiding the rise in share prices includes the guidance. The company maintained its outlook for revenue growth but increased earnings expectations. UniFirst execs increased the low end of the target range by 5.5% to above the prior range’s high end and may be cautious in their estimates. The focus on ERP and CRM should help it accelerate growth and widen its margin with a potential to match industry leader Cintas’s 21.6%, a gain of 1400 basis points over time. 

UniFirst Capital Returns are Growing

UniFirst’s dividend yield isn’t market-beating, but it is among the safest payouts on the market. The 0.75% yield is offset by the payout ratio, balance sheet, and earnings growth, which support the outlook for distribution growth. The company has been making increases annually and can be expected to continue because the payout ratio is below 5%, and the balance sheet is a fortress. The pace of increases has slowed from the triple-digit pace it set earlier this decade but remains solid in the mid-single digits and will help compound returns.

UniFirst also repurchases shares to offset dilution and should continue for the foreseeable future. Regarding the balance sheet, the company has no long-term debt; total liabilities are a mere 0.2x of equity, with equity rising. 

Analysts Drive UniFirst Stock Higher: The Bottom Is In 

The trend in analysts' sentiment is only lukewarm but supports the market for the stock. Post-release revisions include increased price targets from JPMorgan Chase, Robert W. Baird, and UBS, which see this stock as ranging from $175 to $190 or 0% to 9% upside. JPMorgan sets the $175 target, the lowest target on record, providing a floor for the action that aligns with the price action. 

Shares of UNF surged more than 12% on the news to trade near the $175 level. The move created a long green candle that shows support at a critical level while breaking to a three-month high. The market faces resistance at the $180 level but will likely overcome it as subsequent earnings reports are released later in the year.