Massive 46% Revenue Drop For Aramark In Q3 – Can It Recover?

by Trefis Team
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Aramark (NYSE:ARMK) recently reported its Q3 earnings, with revenue plummeting 46% and net income swinging to a loss of $256 million compared to an $83 million profit last year. The stock is down almost 50% year-to-date. Why is this happening? Aramark provides food, facilities, and uniforms to a variety of industries such as education, healthcare, sports, leisure, and corrections. Out of this, sports, education, and leisure have taken a hammering – fueling grim investor expectations. Needless to say, this is an unprecedented situation for the company. However, it seems to be well prepared from a cash flow stand point which suggests that the stock should recover as the demand starts to rebound in the next couple of quarters. Our dashboard Does Aramark Holdings Corporation Have Enough Liquidity To Survive Covid-19 Demand Shock? examines the company’s cash flow generation ability and the resilience of its cost structure.

Aramark – 30% Revenue Decline Scenario

Let’s take a quick look at where Aramark was in 2019. The company reported revenue of $16 billion and a net income of $448 million. Based on this, it generated $984 million in free cash flow from operations which was more than sufficient to cover its nearly $500 million in capital expenditure. However, 2020 is going to be very different. There is a good chance that Aramark could lose nearly 20%-30% of its sales for the full year.

Let’s look at a scenario with 30% revenue decline. Here, we assume that Aramark will employ at least a 50% cut in its capital expenditure on an annual basis to reign in cash flows. We further assume that it will not spend any cash on share repurchases. In such a scenario, we expect full-year cash flow from operations to plummet to $-288 million which would mean cash consumption of nearly $539 million after accounting for capital expenditure of $252 million (50% cut). Not exactly a rosy situation. But investors can take comfort from the fact that over the last few months, the company has significantly strengthened its liquidity position. At the end of fiscal 2019 (end of Sep 2019), Aramark had just around $247 million in its cash pile. This figure increased to $2.4 billion by the end of Jun 2020, which is way more than the company may actually need. The leverage (debt/equity) has gone up, but that’s primarily a function of a steep decline in market value rather than increased debt. We expect that as demand rebounds, leverage is likely to come down meaningfully.

Overall, we believe that Aramark is well placed to ride out the lean demand period, despite the increased leverage and potential cash burn it may face.

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