Company Overview: Aramark is a global provider of food, facilities and uniform services to education, healthcare, business and industry, and sports, leisure and corrections clients. The Company operates through three segments: Food and Support Services North America (FSS North America), Food and Support Services International (FSS International), and Uniform and Career Apparel (Uniform). FSS North America and FSS International segments include food, refreshment, specialized dietary and support services, including facility maintenance and housekeeping, provided to business, educational and healthcare institutions and in sports, leisure and other facilities. The Uniform segment includes rental, sale, cleaning, maintenance and delivery of personalized uniforms and other textile items to clients in a range of industries in the United States, Puerto Rico, Japan and Canada, including manufacturing, transportation, construction, restaurants and hotels, healthcare and pharmaceutical industries.

ARMK Details

Better than expected First Quarter 2018 results: Aramark (NYSE: ARMK) in the first quarter of fiscal 2018 has reported the adjusted earnings per share of $0.59, beating the expectations of the adjusted earnings per share of $0.51. The company had reported the adjusted revenue growth of 4 percent to $3.97 billion in the first quarter of 2018. The revenue grew due to the revenue growth across all three segments. Further, the weaker U.S. dollar has enhanced the sales by over $55 million and had a positive impact on adjusted operating income of $3 million along with a $0.01 positive impact on adjusted earnings per share. ARMK’s top line growth in the first quarter has been the strongest in the last three years.
 

Q1 2018 Sales (Source: Company Reports)
 
Decent organic sales: The group’s overall organic sales rose 5%, with broad based growth across all three reporting segments. The United States organic revenue rose 5% in the first quarter of 2018 due to the broad based growth across business and industry, education, sports, leisure, corrections and facilities. However, United States adjusted operating income was down slightly to $189 million as the base productivity improvements were more than offset by investments in growth associated with the onboarding of multiple new accounts, as well as technology and capability investments. The International segment has posted strong organic revenue growth of 6% in the first quarter due to the growth across Europe, as well as emerging markets. The International adjusted operating income has also increased 6% on a constant currency basis largely due to the base productivity gains. Revenue grew 2% in Uniforms in the first quarter of 2018 due to the solid net new growth. However, the segment’s adjusted operating income has fallen 12% to $46 million owing to prior year pricing actions associated with proactive contract extensions.

Increasing Productivity: For better productivity, the company continues to drive base productivity improvement, primarily due to the reductions in labor as well as SG&A costs. These productivity improvements were offset in the first quarter by startup costs related with the onboarding of several new account wins. Further, ARMK continues to increase the investments in technologies and capabilities that tend to be heavier in the early part of the year. The company’s unit productivity initiatives are building momentum and the company expects to finish the implementation of Ariba in the U.S. by the end of the calendar year. This is the company’s source to pay system that enforces local purchasing compliance with the preferred suppliers, which continues to allow the company to drive down the food spend. On the other side, Aramark during the quarter ending in March is expected to record $30 million to $35 million of net severance charges, which will be related to the recent job cuts. The company is going to take this step to streamline and improve the efficiencies and effectiveness of sales and administrative operations that has affected two tenths of 1 percent of Aramark’s 270,000 employees and 540 positions. Moreover, the job cuts were just over 1 percent of the positions in the Philadelphia area, where the company employs 6,500 people. This works out to about 65 positions, but that included the elimination of open positions and retirements.

Focus on Innovation: The group is focusing on Innovation to maintain their customer satisfaction, target new markets and stay competitive. ARMK continued to enhance their menu design to make sure that they are offering quality, on-trend flavors, healthy options and a number of convenient options through their seasonal promotions, restaurant rotations, pop-up concepts. With these concepts, the group is aiming to deliver fresh products for the consumer while making creative recipes with their celebrity chef partners. The group is also working on the consumer-facing technology to cut the amount of time their customers spend in line. Their test kiosk ordering is ongoing, which cuts down on wait times and facilitates individual order customization. They are also offering on-trend mobile solutions that delivers convenience, as well as enables consumers to meet their nutritional goals. The group is launching an automated checkout powered by artificial intelligence which would enhance the speed of service.

Utmost priority to Health and wellness: The group reiterated that Health and wellness is their top most priority. To deliver nutritious food to consumers, they are adopting the train the trainer approach, to reach over a 1,000 of chefs for creating meals powered by plant-based ingredients. This initiative would support their Healthy for Life campaign with the American Heart Association as it promotes good eating habits. Some of their initiatives on this front, include the hosting of the Super Bowl at the new U.S. Bank Stadium, which is the home of their Minnesota Vikings client. The group is serving as the NFL's exclusive retail merchandise partner at over 100 locations throughout Minneapolis. Lately, Aramark Service at the Super Bowl could help it serve over 1 million fans and guests during the weeklong festivities.
 

FY17 Result (Source: Company Reports)
 
Positive Outlook: Building on the FY17 results and the first quarter 2018 updates, ARMK has increased its outlook for 2018. The adjusted earnings per share is increased by 5-10 cents and forecasted to be in the range of $2.15 to $2.30 per share, which includes 1-2 cents of currency benefit. This FY18 outlook now includes over 20 cents expected benefit related to tax reform, partly offset by 10-15 cents expected dilution due to the acquisitions. The interest expense is now expected to be approximately $350 million, including the acquisition related long-term financing. Further, the company continues to expect full-year free cash flow of greater than $400 million, which has not yet been updated to reflect the benefits of tax reform and the acquisition. Additionally, ARMK expects to deliver at least 3% organic revenue growth this year, due to the strong net new business and consistent mid-90s client retention rates. The company is beginning to leverage Kronos for demand-driven scheduling, that will help the company to further optimize the labor spend. Therefore, the unit cost control efforts on SG&A are yielding a better operating leverage. Looking forward, the company is confident that its adjusted operating margins would rise at the back half of the year as the start-up compression abates, and the company would be able to attain the three-year 100 basis point margin improvement target.
 

Impact of Acquisitions and Tax Reform in FY18 (Source: Company Reports)
 
Stock Recommendation: The shares of ARMK have risen over 19% in the last one year (as of February 07, 2018). The group has also delivered a better customer satisfaction by consistently enhancing the company’s product offerings, expanding their focus on health and wellness, and innovating new technologies to increase the speed of service. Further, the company has recently finished the strategic acquisitions of Avendra and AmeriPride, which the company expects to help enhance the competitive positioning and increase the shareholder value. ARMK has also increased the full-year outlook, due to the benefits from the recent tax reform which would more than offset the near-term dilution of these transactions. Additionally, ARMK would continue to increase the productivity improvements in United States and International base accounts, while reinvesting in technology and capabilities. In the United States, these improvements would more than offset the start-up costs related with onboarding of multiple new accounts. With the stock trading at a decent level, we believe investing in this global provider of food, facilities and uniform services to varied range of clients will be an appealing opportunity given the target in growing markets. ARMK has recently declared a quarterly dividend of $0.105 per share payable on March 1, 2018, to shareholders of record at the close of business on February 14, 2018. We recommend a “Buy” on the stock at the current price of $41.97
 

ARMK Daily Chart (Source: Thomson Reuters)

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