G&K Q2 results consistent with expectations
G&K Services, Inc. reported second quarter fiscal 2010 revenue of $206.4 million, which compares to revenue of $241.8 million in the prior-year period. On a sequential basis, total revenue declined by 0.8 percent as a result of lost revenue due to divestiture activity, continued difficult economic conditions and the impact of holiday shutdowns. These revenue impacts were partially offset by higher sequential direct sale volume, continued stabilization of customer employment levels and a stronger Canadian dollar.
The company reported second quarter net earnings of $0.39 per diluted share, compared to $0.52 per diluted share in the prior year. For the quarter, earnings included gains from divestiture activity and asset sales, which totaled approximately $0.08 per diluted share. Second quarter earnings also benefited from savings from expense reduction activities, lower energy costs, a decrease in merchandise expense and a lower effective tax rate. These benefits were offset by the reduction in fixed cost absorption due to lower revenue. The company drove a sequential improvement in earnings per diluted share, even when excluding the net gain from divestitures and a lower effective tax rate.
"Our results were consistent with our expectations," said Douglas A. Milroy, G&K's chief executive officer. "Second quarter revenue continued to stabilize and we drove a sequential improvement in operating margin and earnings. Our new game plan continues to move us forward as we drive a sharpened focus on increasing customer service, while also reducing costs and improving underperforming locations."
Income Statement Review
Second quarter revenue from rental operations decreased to $191.3 million, down from $221.2 million in the prior-year period. The company's rental organic growth rate was negative 14.0 percent, and reflects continued pressure from lower customer employment levels, increased customer financial difficulties, lower pricing and decreased new account sales. On a sequential basis, the rental organic growth rate was consistent with the company's first quarter results. For the quarter, direct sale revenue was also lower than the prior-year period, as a result of continued weak economic conditions and the non-renewal of one large customer.
Second quarter operating margin was 6.9 percent, compared to 8.1 percent in the prior-year period. When excluding net gains from divestitures and asset sales, second quarter adjusted operating margin was 5.9 percent, up 60 basis points from the company's first quarter adjusted operating margin. The sequential improvement in adjusted operating margin resulted from a reduction in staffing levels, efficient utilization of merchandise and the recent modification of certain benefit and incentive programs. These operating margin improvements were partially offset by costs associated with a union decertification at one location and expenses related to divestiture activity.