Executive Summary / Key Takeaways

• Vestis Corporation, a provider of uniforms and workplace supplies spun off from Aramark, is focused on improving operational efficiency, enhancing customer service, and driving volume growth to overcome recent performance challenges.
• Fiscal Q2 2025 results showed a sequential and year-over-year revenue decline, impacted by seasonal volume adjustments, lower one-time billings, and a significant $15 million bad debt expense adjustment, leading to an operating loss.
• Despite the Q2 setback, management reports positive sequential weekly revenue trends since January 2025 and progress in reducing customer credits by addressing service issues.
• Strategic initiatives, including investments in sales force productivity, national account wins, logistics optimization, and technology adoption (like the new delivery notification system), are underway to improve execution and drive future growth.
• The company amended its credit agreement post-Q2 to increase financial flexibility, restricting dividends and share repurchases while prioritizing deleveraging, signaling a focus on balance sheet strength amidst performance volatility.

Setting the Scene: A New Chapter in Workplace Services

Vestis Corporation, trading under the ticker VSTS, operates as a key player in the North American uniform and workplace supplies market. Spun off from Aramark on September 30, 2023, Vestis provides essential services including uniform rental, servicing, and direct sales, alongside a range of workplace supplies like mats, towels, linens, restroom, first-aid, and safety products. Serving a diverse base across manufacturing, hospitality, healthcare, and other sectors, the company's business model is largely built on recurring, route-based services delivered through multi-year contracts, complemented by direct sales for larger clients.

Upon becoming an independent entity, Vestis articulated a clear strategic vision centered on driving commercial momentum, enhancing operational efficiency, elevating the customer experience, and strengthening its balance sheet through deleveraging. This strategy aims to capitalize on the fundamental market demand influenced by employment levels, hygiene standards, and the ongoing trend of businesses outsourcing non-core functions.

Central to Vestis's operational strategy is leveraging its existing infrastructure and implementing technological solutions to improve service delivery and efficiency. The company utilizes an ABS work order system standardized across its network, providing a unified operating platform. Furthermore, Vestis has invested in customer-facing technology, including a self-serve portal and a newly introduced on-time delivery notification system. This notification system provides customers with real-time updates on product pickup and delivery, enhancing transparency and accountability. Internally, the company is developing standard operating procedures, such as one for managing product shortages, which in pilot locations has shown promising results with an almost 50% reduction in related service requests. While broader plant automation and lean layout optimization are noted as future opportunities, the current technological focus is on standardizing processes and improving customer interaction and operational execution. These technological and operational efforts are intended to bolster the company's competitive position by improving service quality and driving efficiency, crucial factors in a market where product quality, service reliability, and price are primary competitive levers.

Performance Under Pressure: Navigating Headwinds

Vestis's journey as an independent public company has encountered notable challenges, reflected in its recent financial performance. For the three months ended March 28, 2025 (Q2 fiscal 2025), consolidated revenue stood at $665.2 million, a decrease of 5.7% compared to $705.4 million in the prior-year quarter. The six-month period ended March 28, 2025, saw revenue of $1.35 billion, down 5.2% from $1.42 billion in the corresponding prior-year period.

This decline was primarily attributed to a combination of factors, including lost business exceeding new business, lower revenue from existing customers (partially due to a $4 million sequential decrease in lost and ruined, or L&R, billings in Q2), and lower direct sales, which also experienced typical seasonality with Q1 being historically stronger. Management specifically noted a significant decline in volume from existing customers in January 2025, as some, particularly in hospitality, seasonally adjusted their demand for workplace supplies. This volume decline, coupled with volume-related credits issued to address service concerns, negatively impacted revenue.

The impact on profitability was pronounced. Vestis reported an operating loss of $8.6 million for the three months ended March 28, 2025, a significant decrease from operating income of $43.1 million in the prior-year quarter. For the six-month period, operating income was $21.8 million, down sharply from $90.7 million in the prior year. This deterioration was largely driven by increased selling, general, and administrative (SGA) expenses, which rose by $25.3 million or 20.6% in Q2 2025 compared to the prior year. A substantial portion of this increase stemmed from a one-time $15 million adjustment to the allowance for credit losses based on updated collectability estimates, as well as higher severance charges ($7.7 million in Q2 2025) and accelerated share-based compensation expense related to executive departures. While the cost of services decreased ($14.4 million or 2.9% in Q2 2025), reflecting lower volume and reduced wages/payroll and merchandise costs, the relatively fixed nature of these costs resulted in gross margin compression as revenue declined.

Despite the challenging Q2 results, management highlighted some positive trends emerging late in the quarter and into April 2025. They reported recovering the majority of the January volume decline and noted sequential monthly revenue growth since January, with the April run rate 3.4% higher than in January. Actions taken to improve customer service, specifically addressing product shortages and cleaning quality, were cited as leading to a significant reduction in weekly customer credits, contributing to the improved revenue run rate.

Strategic Levers and Operational Focus

In response to performance pressures and to build a foundation for future growth, Vestis is actively pulling several strategic and operational levers. A key focus is on improving commercial momentum by accelerating new business wins and enhancing customer retention. The company's frontline sales team is now fully staffed, and management reported a 10% increase in average productivity per sales representative over Q2 2025. Collectively, field sales and national account teams installed 35% more recurring revenue year-over-year and 10% more than in Q1 2025. New business contributed 2.4% to revenue growth in Q2 2025, and the gap between new business and lost business narrowed compared to Q1. Customer retention stood at 92.4% on a rolling 12-month basis at the end of Q2 2025, consistent with historical annual rates. Management is particularly focused on positioning route sales representatives for success, recognizing their critical role in customer relationships and service delivery.

Operational efficiency remains a core pillar. Vestis possesses approximately 35% underutilized wash capacity in its current plant footprint, providing significant operating leverage potential as volume grows without requiring substantial capital investment in new facilities or equipment. Initiatives like logistics optimization and merchandise reuse programs are expected to yield meaningful cost savings in fiscal 2025. The company is also executing a portfolio of cost takeout initiatives, including optimizing field operations and rationalizing back-office G&A, with many actions already implemented in Q1 2025.

Enhancing the customer experience is paramount to improving retention and enabling pricing power. Vestis is implementing new procedures across its plants to address issues like shortages and on-time delivery, aiming to elevate service levels beyond historical performance. The introduction of the real-time customer delivery notification system is a tangible step in this direction, enhancing transparency and accountability. A dedicated customer experience team has also been established to drive continuous improvement.

Leadership changes occurred in Q2 2025, with Phillip Holloman appointed Interim Executive Chairman, President, and CEO, and Kelly Janzen joining as CFO. Subsequent to the quarter, Jim Barber was appointed President and CEO, effective June 2, 2025, with Mr. Holloman returning to his Chairman role. These leadership transitions signal a focus on bringing new perspectives and operational expertise to guide the company forward.

Competitive Landscape and Positioning

Vestis operates in a competitive market dominated by larger national players like Cintas Corporation (CTAS) and UniFirst Corporation (UNF), alongside regional and local providers, and the alternative of in-house operations. Competition primarily revolves around product quality, service reliability, and pricing.

Comparing key financial metrics using available TTM data highlights the competitive dynamics. Cintas, the market leader, demonstrates superior profitability and efficiency metrics, with a TTM Gross Profit Margin of 49%, Operating Profit Margin of 22%, EBITDA Margin of 28.23% (based on EV/EBITDA), and a robust Return on Equity of 36%. UniFirst shows solid, albeit lower, margins (Gross Profit Margin 35%, Operating Profit Margin 8%, EBITDA Margin 10.61% based on EV/EBITDA), and a moderate Return on Equity of 7%. Aramark (ARNK), with its broader facility services portfolio, has lower margins in its uniform segment (Gross Profit Margin 8%, Operating Profit Margin 4%, EBITDA Margin 12.85% based on EV/EBITDA), and a Return on Equity of 9%. ABM Industries (ABM), primarily in facility services, has a Gross Profit Margin of 13%, Operating Profit Margin of 3%, and EBITDA Margin of 11.44% (based on EV/EBITDA), with a Return on Equity of 5%.

In comparison, Vestis's TTM Gross Profit Margin stands at 27.94%, Operating Profit Margin at 3.26%, and EBITDA Margin at 8.23%. Its Debt/Equity ratio is 1.60, higher than Cintas (0.62) and UniFirst (0.03), but potentially lower than Aramark (1.83). Vestis's Return on Equity is 2%.

This comparison reveals that Vestis currently lags its larger publicly traded competitors in overall profitability margins and financial efficiency metrics like ROE. Cintas, in particular, sets a high bar for operational excellence and financial performance. Vestis's strategic challenge is to close this gap by improving its own execution.

Vestis's competitive positioning relies on leveraging its operational footprint and supply chain for recurring service, offering a diverse product range including specialized items, and focusing on customer service to drive retention and growth. While it may not have the sheer scale of Cintas, its focus on specific operational improvements (like logistics optimization and the new service notification system) and targeted sales efforts (national accounts, increased field sales productivity) are aimed at carving out and defending market share. The ability to win new business from competitors (56% of Q2 2025 field sales wins) and convert non-programmers (44% of Q1 2025 field sales wins) demonstrates its capability to compete effectively at the local level. However, the recent struggles with customer service issues impacting revenue and the need for a significant bad debt adjustment highlight areas where execution must improve to match the reliability offered by best-in-class competitors.

Liquidity, Capital Allocation, and Outlook

Strengthening the balance sheet and improving liquidity remain key priorities for Vestis. As of March 28, 2025, the company had $28.8 million in cash and cash equivalents and $264.3 million available under its revolving credit facility. Total principal bank debt outstanding was $1.17 billion, a reduction of $327 million since the end of fiscal 2023.

Vestis has actively pursued deleveraging through various means. In fiscal 2024, the company made approximately $105 million in principal payments, including $85 million in voluntary payments. Subsequent to the third quarter of fiscal 2024, Vestis entered into a $250 million accounts receivable securitization facility, which provided early access to cash from receivables and was used to repay term loan debt. This facility, with fees reflected in Other Expense/Income, net ($3.2 million in Q2 2025), enhances liquidity and reduces net debt. Additionally, the $35 million in after-tax proceeds from the sale of the Japanese joint venture in October 2024 were used for debt repayment.

Subsequent to the end of Q2 2025, on May 1, 2025, Vestis amended its Credit Agreement. This amendment provides additional financial flexibility by increasing the net leverage covenant ratio thresholds through the end of fiscal 2026. It also included a $15 million bad debt expense adjustment for the Q2 2025 covenant calculation, resulting in a reported 4.2x net leverage ratio for that period. As part of this amendment, the company agreed to restrict all dividends and share repurchases until certain leverage targets are met (net leverage ratio <= 4.50x for two consecutive quarters through the end of fiscal 2026, or a fiscal quarter ending after October 2, 2026, with covenant compliance). While Q2 and Q3 2025 dividends were paid prior to this restriction taking full effect, future payments are now subject to these conditions. This restriction underscores the company's commitment to directing available cash towards debt reduction.

Given the recent performance volatility and the uncertain macro environment, Vestis has withdrawn its full-year fiscal 2025 guidance and shifted to providing quarterly guidance. For the third quarter of fiscal 2025, the company expects revenue in the range of $674 million to $682 million and adjusted EBITDA of at least $63 million. This guidance implies sequential improvement from Q2 2025 results, which management attributes to the positive weekly revenue trends observed since January and ongoing efforts to improve operations and reduce customer credits. While free cash flow guidance is no longer provided, the company remains focused on improving cash flow conversion over the long term, with the elimination of the dividend expected to free up cash for deleveraging.

Key risks to this outlook include the potential for unfavorable economic conditions to impact customer demand and employment levels, the ability to successfully retain existing customers and win new business in a competitive market, the effectiveness of ongoing operational and service improvement initiatives, potential increases in operating costs (labor, fuel), and the ability to manage its debt obligations, particularly given the reliance on the AR securitization facility and the need to comply with amended covenants. The ongoing legal proceedings, including shareholder class action lawsuits, also represent a potential risk.

Conclusion

Vestis Corporation is a company in transition, working to establish its footing as an independent entity in the competitive uniform and workplace supplies market. The recent financial results, particularly the operating loss and significant bad debt expense in Q2 2025, highlight the challenges the company faces, including the need to improve customer service execution and drive consistent volume growth.

However, the narrative is not solely one of headwinds. Vestis possesses fundamental strengths, including a recurring revenue model, a broad operational footprint, and strategic assets like underutilized plant capacity and a growing suite of technological tools aimed at enhancing efficiency and customer interaction. The company is actively implementing strategic initiatives focused on improving sales force effectiveness, winning national accounts, optimizing operations, and elevating the customer experience. Recent positive trends in weekly revenue and reduced customer credits suggest that these efforts are beginning to yield results, albeit from a lower base. The amendment to the credit agreement, while imposing restrictions, provides necessary financial flexibility and reinforces the company's commitment to deleveraging, a critical step in building long-term value.

The investment thesis for Vestis hinges on its ability to successfully execute its strategic plan, translate operational improvements into sustained revenue growth and margin expansion, and continue to strengthen its balance sheet. The competitive landscape, dominated by larger, more profitable players, necessitates flawless execution. Investors should closely monitor key metrics such as net volume growth (new wins vs. losses), customer retention rates, the realization of cost savings from efficiency initiatives, and progress towards deleveraging targets. While the path forward involves challenges, the strategic levers being pulled, coupled with recent signs of operational improvement, offer a potential pathway to unlock value in the attractive workplace services market.