Vestis' Q4 2025 Earnings Call: Contradictions in Pricing Strategy, Customer Growth, and Plant Optimization

Date of Call: December 2, 2025

Financials Results

• Revenue: $712M reported; ≈$660M normalized (excludes $52M extra operating week), down 3.5% YOY on normalized basis
• Gross Margin: 25.1%, down 366 basis points vs Q4 2024
• Operating Margin: Adjusted EBITDA margin 9.1% reported (9.8% normalized); versus 11.8% in Q4 2024 and 9.5% in Q3 2025

Guidance:

• Revenue for FY2026 expected flat to down 2% vs normalized FY2025.
• Adjusted EBITDA guidance $285M–$315M (midpoint $300M); assumes ~ $40M incremental lift in 2026 and $75M run‑rate savings by end of 2026; $25–$30M restructuring costs excluded from EBITDA.
• Free cash flow expected $50M–$60M; CapEx ~ $60–$65M (similar to 2025).
• Effective tax rate expected 25%–30%.

Business Commentary:

* Revenue Challenges and Transformation Plan: - Vestis reported normalized revenue of $660 million for Q4, down 3.5% year-over-year compared to the previous year. - The decline in revenue was due to $18 million decrease in rental revenue and $5 million in lower direct sales revenue. - The company has identified issues such as a focus on revenue quality over financial thresholds and loss of customer service quality, leading to the launch of a multiyear business transformation plan.

• Operational Efficiency and Cost Control:
• Vestis made targeted reductions in the field sales team to align the cost structure with revenue and growth opportunities.
• The company plans to remove excess costs from operations, aiming for at least $75 million in run rate operating cost savings by the end of 2026.

• These actions are part of a strategy to improve plant performance, organizational efficiency, and customer service quality.

• Focus on Customer Retention and Pricing Strategy:

• The business retention rate in terms of revenue dollars was 91.8%, flat compared to the previous quarter.
• Vestis is introducing new tools to measure and improve customer satisfaction, and adopting a new strategic pricing approach.

• The focus is on improving customer retention by delivering high-quality, profitable service, and addressing churn challenges.

• Asset and Network Optimization:

• The company is accelerating evaluations of route efficiency and consolidation of underutilized locations to improve service delivery and cost effectiveness.
• Foundational to these efforts is investing in facilities and equipment to enhance service quality and reduce downtime.
• These initiatives are part of a broader strategy to optimize the asset base and network for cost savings and improved service delivery.
  

  Sentiment Analysis:

  Overall Tone: Neutral

  • Management expressed optimism about a multiyear transformation and a $300M adjusted‑EBITDA midpoint, but Q4 showed normalized revenue down 3.5% YOY and gross margin of 25.1% (down 366 bps), indicating recovery is contingent on execution of planned initiatives.

Q&A:

• Question from Manav Patnaik (Barclays): Where are you in terms of culture transformation and do you have the right team to execute the plan; and how should we think about the financial framework beyond 2026?
  Response: Management: Culture change centers on operational excellence with plant performance as the priority (≈75% of $75M savings); leadership/team are in place and longer‑term (post‑2026) financial targets will be provided as 2026 execution proves out.

• Question from Benjamin Luke McFadden (William Blair): Should we expect consolidation of capacity/locations and how much capacity do you plan to take out to streamline operations?
  Response: Management: Network consolidation is secondary—first optimize plant operations (majority of value); modest consolidation in 2026 but larger network decisions will follow after plant optimization and commercial prework.

• Question from Benjamin Luke McFadden (William Blair): How are nonrecurring transformational costs treated in FY2026 guidance and how much of the $25–$30M restructuring is expected to follow this year?
  Response: Management (CFO): The $25–$30M restructuring charges are excluded from adjusted EBITDA guidance; the EBITDA range is built from the normalized Q4 run rate plus ~ $40M of incremental in‑year savings (part of the $75M run‑rate).

• Question from Andrew Steinerman (JPMorgan): What assumptions underpin the $50–$60M FY2026 free cash flow guide, its phasing, and will you need to raise capital for planned investments?
  Response: Management (CFO): FCF assumes midpoint EBITDA $300M, interest ≈$95M, cash taxes ≈$50M, $25–$30M restructuring, and CapEx ≈$60–$65M (similar to 2025); cash flow expected roughly evenly phased and no capital raise is anticipated for near‑term needs.

• Question from Andrew J. Wittmann (Robert W. Baird): How will you manage change to drivers/routes/depots to avoid customer disruption during asset optimization, and what steps ensure quality?
  Response: Management: Prioritize getting plants to ~93–94% efficiency before meaningful consolidation; perform isolated, logical moves now but reserve broad network consolidation until plants and commercial processes (profitability tools) are validated.

• Question from Andrew J. Wittmann (Robert W. Baird): You noted same‑customer revenue was about flat year‑over‑year—how should investors view that result in the current macro/labor context?
  Response: Management: Flat same‑customer revenue reflects prior over‑emphasis on new lower‑quality wins; priority is to grow existing $2.7–$2.8B book via penetration and targeted pricing to drive durable organic growth.

• Question from Keen Fai Tong (Goldman Sachs): What pricing increases are you targeting going forward given the new pricing strategy?
  Response: Management: No single % target provided—pricing will be set after optimizing cost‑to‑serve; approach will be both tactical and strategic based on profitability analysis and improved service levels.

• Question from Keen Fai Tong (Goldman Sachs): Are the targeted reductions to the field sales team largely complete and how will sales headcount evolve to support growth?
  Response: Management: Reductions were targeted to reallocate investment into market development reps; future sales headcount will be determined by execution and demonstrated ROI—size may grow if initiatives prove effective.

• Question from Shlomo Rosenbaum (Stifel): Can you comment on employee engagement and turnover trends since you joined?
  Response: Management: Engagement is currently subdued after recent changes; leadership will communicate and rebuild confidence this week; plant turnover is improving but not yet at desired levels.

• Question from Harold Antor (Jefferies): How will your pricing implementation differ from prior management to avoid repeating past negative effects?
  Response: Management: New approach aligns pricing to optimized cost‑to‑serve and improved service backed by profitability tools, making pricing more disciplined and targeted than prior broad revenue‑first strategy.

• Question from Harold Antor (Jefferies): How much of the product mix shift has already occurred and how have customers reacted?
  Response: Management: The company lost ~8% of uniform business as mix shifted to lower‑margin workplace supplies; plan is to refocus on core uniform products, adjust incentives, and early quarter trends are tracking to plan.

Contradiction Point 1

Pricing Strategy and Focus

It highlights a shift in the company's pricing strategy and focus, which is crucial for revenue stability and growth.

How will the new pricing strategy impact pricing increases? - Keen Fai Tong (Goldman Sachs)

2025Q4: Our pricing strategy considers network optimization and customer value. We will adjust pricing to match service improvements and cost efficiencies, ensuring fair and competitive pricing. - James Barber(CEO)

Will there be changes in capital allocation and investment levels, and what factors are driving these changes? - John Ronan Kennedy (Barclays)

2025Q3: James Barber mentioned focusing on customer penetration, conversion, and churn reduction to drive growth. He also emphasized the need for a value-based pricing model. - James Barber(CEO)

Contradiction Point 2

Customer Revenue Growth Strategy

It involves differing approaches to customer revenue growth, which is essential for the company's financial health.

How do you view same-store sales remaining flat despite macroeconomic challenges? - Andrew J. Wittmann (Baird)

2025Q4: We are focusing on growing revenue from our existing customer base, which has been underinvested in the past. Our strategy is to improve service quality and align pricing to reflect service value, which will support future growth. - James Barber(CEO)

What's the outlook for the uniform rental industry's health and competitive landscape in the near term? - Jinru Wu (Goldman Sachs)

2025Q3: James Barber believes the segment is healthy, driven by non-program growth accounting for 45% of the company's growth. - James Barber(CEO)

Contradiction Point 3

Plant Optimization and Network Changes

It involves the strategy for optimizing plants and managing network changes, which impacts operational efficiency and customer satisfaction.

Are you consolidating capacity in certain regions, and if so, by how much? - Benjamin Luke McFadden (William Blair)

2025Q4: We are initially focusing on optimizing plants rather than consolidation. While there will be network changes in the future, the current priority is to optimize our existing operations for better performance. - James Barber(CEO)

What cost-cutting measures are possible? How should we view free cash flow with the new earnings level? - Andrew J. Wittmann (Baird)

2025Q2: We have a plan to consolidate from 75 to 50 plants. As we consolidate those plants, we'll be able to free up 20% more capacity through consolidation. - James Holloman(CEO)

Contradiction Point 4

Service Improvement and Customer Satisfaction

It involves the company's approach to improving service quality and customer satisfaction, which directly impacts customer retention and revenue growth.

What steps are you taking to prevent customer impact from network changes, and can you explain new tools to enhance product profitability? - Andrew J. Wittmann (Baird)

2025Q4: We are optimizing plants to provide a solid foundation before streamlining the network. New tools for product profitability are being developed using UPS systems, to be launched in Q2, which will guide future decisions and improve customer satisfaction. - James Barber(CEO)

What steps are needed to resolve service issues, and how do you differentiate from Cintas? - Shlomo Rosenbaum (Stifel)

2025Q2: We're better organized, focusing on customer-centric service and positioning route service reps for success. In the second quarter, we are rolling out a new UPS app that will give the route drivers a GPS map to the customers and will make it much easier for them to find their customers. - James Holloman(CEO)

Contradiction Point 5

Pricing Strategy and Stringency

It involves the company's approach to pricing strategy, which impacts revenue and market competitiveness.

How will the new pricing strategy impact price increases? - Keen Fai Tong (Goldman Sachs)

2025Q4: Our pricing strategy considers network optimization and customer value. We will adjust pricing to match service improvements and cost efficiencies, ensuring fair and competitive pricing. - James Barber(CEO)

What caused year-over-year revenue declines and how did pricing strategy contribute? - George Tong (Goldman Sachs)

2025Q2: In July, we rolled out a new pricing policy that will sunset back-to-back pricing and will sunset double discounting, which we call, oh, sorry, double discounting. - Kelly Janzen(CFO)