Rising Unemployment Levels Curtails Cintas’ Top-line Growth

According to the data released by the Bureau of Labor Statistics, the U.S. economy has lost around 7.2 million jobs since the start of the recession in December 2007. The national unemployment rate rose to 9.5% in June 2009, the highest in more than 25 years.

Increasing job losses are adversely impacting Cintas Corporation’s (CTAS) revenue growth. Cintas is predominantly a corporate identity uniform company that also provides ancillary services. The company has stated that many of its customers have been forced to reduce employment levels and consolidate facilities due to the challenging business environment.

These reductions and consolidations have negatively impacted the company’s top line growth. The company estimates that the fourth quarter revenue for fiscal 2009 will come in 12–14% lower compared to the prior-year level. We believe the demand weakness will persist in fiscal 2010 also as we expect additional workforce reductions and plant closures by companies across sectors.

Cintas is actively managing its cost structure to adjust to the weak demand conditions. The company is focused on eliminating all non-value added work throughout the organization. In addition, Cintas is reviewing its route structures.

The company intends to consolidate routes and eliminate those that are redundant. The company is also analyzing better production processes and equipment which it believes will have a positive impact on its operational cost structure in the future.

These cost reduction initiatives along with declining energy prices are expected to partially offset the impact of weak demand. Management forecasts diluted EPS in the range of $0.34–$0.37 for the fourth quarter of fiscal 2009, compared to $0.58 in the prior-year quarter.

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