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UniFirst (NYSE:UNF)

Q3 2013 Earnings Call

June 26, 2013 10:00 am ET

Executives

Steven S. Sintros - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Ronald D. Croatti - Chairman, Chief Executive Officer and President

Analysts

Andy Debes - KeyBanc Capital Markets Inc., Research Division

Molly R. McGarrett - JP Morgan Chase & Co, Research Division

Christopher McGinnis - Sidoti & Company, LLC

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Dan Dolev - Jefferies & Company, Inc., Research Division

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter earnings call. [Operator Instructions] I would now like to turn the conference over to Steven Sintros, Chief Financial Officer. Please go ahead.

Steven S. Sintros

Thank you, and welcome to the UniFirst Corporation conference call to review our third quarter results for fiscal 2013 and to discuss our expectations going forward. I'm Steven Sintros, UniFirst's Chief Financial Officer. Joining me today is Ronald Croatti, UniFirst's President and Chief Executive Officer. This call will be on a listen-only mode until we complete our prepared remarks. Now before I turn the call over to Ron, I would like to give a brief disclaimer.

This conference call may contain forward-looking statements that reflect the company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties. The words anticipate, optimistic, believe, estimate, expect, intend and similar expressions that indicate future events and trends identify forward-looking statements. Actual future results may differ materially from those anticipated depending on a variety of risk factors, including, but not limited to, the continued availability of credit and the performance of capital markets; the performance of acquisitions; fluctuations in the costs of materials, fuel and labor; and the outcome of pending and future legal and environmental matters. I refer you to our discussion of our risk factors in our most recent 10-K and 10-Q filings with the Securities and Exchange Commission.

Now I will turn the call over to Ron Croatti for his comments.

Ronald D. Croatti

Thanks, Steve, and welcome to all of you joining us for a review of our UniFirst's Third Quarter Financial Results for fiscal 2013. As always, I will provide you with a brief overview of our performance. And I'll turn it back over to Steve to elaborate on the details.

I am pleased to report the company revenue for the third quarter of fiscal 2013 has had another new record for UniFirst at $335.8 million, a 4.6% increase over the $320.9 million reported the same quarter in 2012. Net income was also a new third quarter record, coming in at $28.7 million, a 23.6% improvement over the same period last year, after adjusting for a large gain recognized in 2012 third quarter related to a legal settlement.

Our Core Laundry Operations, which account for the majority of UniFirst business, led the company's performance during the quarter with a revenue increase of 5.9%, and an operating income improving by 30.5% over 2012 third quarter results. Again, that's after the adjustment for the last year's legal settlement. Both revenues and operating income were new third quarter records for this segment.

As for the Specialty Garments segment, which is made up of specialized nuclear and cleanroom operations. This group reported a third quarter dip of 10% revenues and a 29% drop in operating income when compared to the same quarter in 2012. As stated in previous webcasts, however, we expect this segment to show improvement with the nuclear division getting involved with several new reactor projects in the U.S. and Canada in the coming years in the cleanroom division, further capitalizing on the solid presence of ultra clean niche markets they serve.

Our First Aid & Safety segment, which is it made up of our route-based first aid service, pharmaceutical packaging and wholesale operations, continued reporting solid growth in the third quarter, increasing revenue by 11.2% and improved operating income by 36.7%, when comparing quarter-to-quarter to 2012. And we fully expect this segment to continue to positive trend to close out the year strong.

We are happy with UniFirst's overall third quarter results and continued financial success. In fact, UniFirst was recently recognized for financial performance by the Boston Globe on its Globe 100 list, as a result of continuous growth in revenue and profits, and return to our shareholder equity. We are proud to be 1 of only 4 companies that have made the Massachusetts based public list company every year since the annual ranking began 25 years ago. So we would like to thank the Boston Globe for their continued recognition of UniFirst.

New sales in our Core Laundry business remained the catalyst for ongoing organic growth. And throughout the third quarter, sales continue to track well, complemented by improvements in both sales rep turnover and rep work weeks. Additionally, our service sales showed solid gains over 2012, largely due to ongoing route sales promotions and introduced the new ancillary products and services to existing customers throughout the year.

We continue to hold our professional sales team accountable for continuous improvement, while providing our reps and managers with increased level of sales training and support. The goals are to ensure there's a continued focus on both process and productivity at all sales levels and to help individuals gain incremental success and keep them personally motivated and involved as a contributor.

As for investment in the sales rep productivity, in the third quarter we gained the process of converting the handheld device that all our sales reps use from an older generation BlackBerries over to the latest generation iPad tablets. These devices with customized applications provide more effective prospect managing, allowed for greater flexibility and scheduling, recording activity and reports. The iPad system also provides reps with new, high-quality presentation capabilities to help them share our story more effectively to true perspective customers. A company-wide rollout has begun and has been going smoothly, and we expect to see measurable benefits in 2014.

So as we look toward the remainder of fiscal 2013 and into 2014, we will be staying the course as far as our business strategies are concerned. We believe although economic conditions may be stabilized, the recession recovery process will remain a slow one. So we'll ensure all our team member and partners to remain flexible and financially responsible, and we will continue concentrating on the factors we can control to help maintain our growth. These include keeping customers through service excellence and cost-saving advantages, selling aggressively into existing and new markets, committing to cost control and creative management to save dollars, wherever sacrifice -- without sacrificing service to our customers or product quality. It is this basic model we have maintained for the last 5-or-so years and has proven to be successful.

That said, we're confident at year end that we will be reporting another year of solid growth and returns to our team partners and our shareholders. Now I'd like to turn the call back to Steve.

Steven S. Sintros

Thanks, Ron. Revenues were $335.8 million, up 4.6% from $320.9 million a year ago. Net income was $28.7 million in the quarter or $1.43 per diluted share compared to $27.5 million or $1.37 per diluted share reported in the year-ago period. The results of the third quarter of fiscal 2012 included the positive effect of a settlement related to environmental litigation. The settlement resulted in a $6.7 million gain, which was recorded as a reduction in selling and administrative expenses in the third quarter of 2012. Diluted earnings per share for the third quarter of 2012 adjusted to eliminate the effect of the gain was $1.16. Current quarter diluted earnings per share increased 23.3% compared to the adjusted earnings from a year ago.

Third quarter revenues in the Core Laundry Operations were $297.7 million, up 5.9% from those reported in the prior year's third quarter. The impact of certain small acquisitions, offset the slightly negative impact of a weaker Canadian dollar, leaving organic growth for the quarter for the Core Laundry at 5.9%. The company's revenues continue to benefit from solid new account sales. In addition, certain annual price adjustments, as well as higher collections of merchandise recovery charges also contributed to revenue growth during the quarter.

Wearer additions versus reductions were negative in the third quarter, and remained negative year-to-date. We did see some modest improvement in these metrics sequentially compared to the second quarter. This segment's income from operations increased 36.5% compared to the third quarter of fiscal 2012 when adjusted to exclude the impact of the $6.7 million gain I referred to earlier. Operating margin for the quarter was 13.6% compared to an adjusted operating margin of 10.5% a year ago.

Increased profitability in this segment was primarily the result of improved operating leverage that came with our revenue growth. Expenses related to merchandise, payroll and energy were all lower as a percentage of revenue compared to the prior year. Our operating results continue to benefit from improvements in some of our historically underperforming laundry plants. These gains, as well as strong execution in our plant operations, as well as in the collection of merchandise recovery charges, have helped our overall margins. In addition, comparisons were positively impacted by amounts that were expensed in the third quarter of fiscal 2012 related to the company's initiative to update our CRM computer systems.

Energy cost for the quarter were 5.4% compared to 5.6% a year ago, primarily due to lower fuel costs for our fleet of delivery vehicles as a percentage of revenues. Revenues for our Specialty Garments segment, which consists of nuclear decontamination and cleanroom operations, were $26.3 million for the quarter, down 10% from $29.3 million in the third quarter of fiscal 2012. This segment had income from operations for the quarter of $3.6 million, down from $5 million in the same quarter a year ago. Year-to-date this segment's revenue and operating income are down 7.5% and 32.6%, respectively. This decline is primarily due to the completion of 2 major projects in the latter part of fiscal 2012. Weaker results from this segment's European operations due to the shutdown of several nuclear power reactors in Germany has also impacted comparisons. In addition, a number of outages scheduled for this year have been delayed or not materialized at the levels expected.

First Aid segment revenues increased 11.2% to $11.7 million in the quarter compared to $10.5 million in the same quarter a year ago. Income from operations for this segment increased to $1.9 million from $1.4 million in 2012. All facets of this segment's operations, including the van operations, pill packaging and wholesale distribution operations, all contributed to a strong results in the quarter and year-to-date periods.

The income tax rate for the quarter was 37.3% compared to 35.2% for the third quarter of fiscal 2012. The increase in effective tax rate is due primarily to the fact the 2012 rate benefited from the reversal of tax contingency reserves related to the resolution of certain state tax audits. We fully expect our full year fiscal 2013 effective income tax rate to be approximately 38.3%.

Our balance sheet and overall financial position continue to be very strong. At the end of the third quarter, the company had $175.6 million of cash and cash equivalents on hand, up from $120.1 million at the end of fiscal 2012. Of this amount, $60.1 million has been accumulated by our foreign subsidiaries and is intended for future investments outside the United States. As of the quarter end, total debt was $110.9 million and total debt as a percent of capital was 10.1%.

For the first 9 months of the fiscal year, cash provided from operating activities was $139.5 million, up 30% from $106.8 million for the same period a year ago. The increase was primarily due to higher net income, as well as lower cash outflows related to working capital. Capital expenditures for the first 9 months of 2013 were $81.1 million. The higher capital expenditure level is partially the result of costs related to our Unity 20/20 CRM system project. Year-to-date, we have capitalized $16.4 million related to this project.

In addition, this year's expenditures to date, including the purchase of a building for a new laundry plant in the first quarter, as well as costs related to 2 plant reconstruction projects. We now expect capital expenditures for fiscal 2013 to be between $95 million and $100 million. We continue to invest in plant updates, expansions and automation that will allow us to achieve our long-term strategic objectives. We also continue to look for acquisition targets as acquisitions remain an integral part of our overall growth strategy.

As always, we'd like to take this opportunity to provide you with an update regarding our outlook for the remainder of the fiscal year. We continue to expect that revenues for the full year will be between $1.344 billion and $1.354 billion. At this time, based on our results year-to-date, we expect that our full year revenues will come in at the higher end of this previously communicated range.

Based on the weaker-than-expected results from our Specialty Garments segment in the third quarter and the fourth quarter outlook for this segment, we are reducing and narrowing our full year profit guidance to a range of $5.60 per share to $5.70 a share from a previous communicated range of $5.65 a share to $5.80 per share.

As we have mentioned in the past, factors such as the timing and length of reactor outages and other projects, as well as the funding for projects from both government and private sources, can significantly impact this segment's revenues and profits and make forecasting its results challenging.

In addition, our outlook for the remainder of the year was impacted by higher than expected investments in new merchandise and service made by our Core Laundry Operation during the third quarter. Although a certain amount of uptick in merchandise investments is typical this time of year, this is the trend we are closely watching to determine the impact that merchandise amortization will have on our operating margins as we look to next year.

We would like to remind you that fiscal 2013 will be a 53-week year compared to 2012. This nuance in our fiscal calendar will have the impact of increasing revenues and operating income for the full year approximately 2% compared to 2012. The extra week will fall in our fiscal fourth quarter and provide the fourth quarter additional revenue and operating income growth of approximately 8%.

As we discussed last quarter, we anticipate mid-single-digit top line growth to be a reality looking ahead to fiscal 2014, absent further improvement in the overall economic landscape or more significant acquisition activity. In addition, as we've mentioned in past calls, deployment and other transition costs, as well as the eventual depreciation of our Unity 20/20 CRM system investment, will pressure margins going forward. We also continue to evaluate the impact of the Affordable Care Act will have on our overall cost structure in future years. We look forward to updating you regarding these items in the upcoming quarters.

This completes our prepared remarks. We'll now be happy to answer any questions you might have.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Andy Debes with KeyBanc Capital Market.

Andy Debes - KeyBanc Capital Markets Inc., Research Division

This is Andy filling in for Joe. Just wanted to, first kind of dive in into the organic growth rate in the Core Laundry segment. Obviously, moderated, as expected, here in the back half. But I wanted to know if you could kind of parse into whether or not you're seeing any new account activity actually slow or any other material slowdown in the business or if it's really just the function of the tougher comps that you guys expected?

Ronald D. Croatti

I think it's really more of the tougher comps. Our sales force is still writing, actually, writing more dollars than we wrote last year. The prospects are still out there, no programmers. People are basically purchasing direct sale accounts are our prime target to convert. So I think we basically seen things pretty consistent, is my answer to you.

Andy Debes - KeyBanc Capital Markets Inc., Research Division

I guess then, maybe also just to get a bit more granular. Anything you're seeing or hearing from those existing customers that -- I know you mentioned the ad quits are down again in the quarter. But any bright spots out there or is it still the general hesitancy to add headcount among all customers?

Ronald D. Croatti

I think it's more related by industry. Last year and the year before, basically, the energy industry was a big push, that slowed a little bit. I think what we're seeing now is a lot of smaller accounts that want to be competitive down the Street, but there are other competitor. And they're pretty easy sale or a good opportunity for a sale to get them into an image and identity program. I think the larger accounts are still working on the committee-type selling arrangements that are -- take longer to do, to be honest. So I guess, the bottom line is it's fairly consistent.

Andy Debes - KeyBanc Capital Markets Inc., Research Division

Okay. That's helpful. And then just to checkup on it, you had mentioned about 5% organic in the back half taking another growth rate in 3Q, that implies about 4% in the last quarter. Is that still a reasonable way to think about it or any expectations changed there?

Steven S. Sintros

No. I think organic in the fourth quarter for the laundry should still be in that 5% range with the difference coming from a little bit of shortfall in nuclear.

Andy Debes - KeyBanc Capital Markets Inc., Research Division

Okay. That's helpful. And then the only -- the other thing I wanted to comment on, Steve, we talked a bit last quarter about the need for increase investment to support recent growth. I think the expectation was for SG&A to be flat to even up slightly, whereas it came in lower on both a dollar basis and a percent of revenue basis. Can you maybe just give a little more detail around some of the moving pieces you noted in the press release? And maybe help us clarify whether we should still expect that to flatten or move higher as we get into the last quarter and particularly in 2014?

Steven S. Sintros

Yes. I think, the comparison if you're looking at compared to the prior year, SG&A being lower. As we mentioned in the press release and my comments, there were some cost related to the -- our systems project that didn't qualify for capitalization earlier on in the project that we expensed a year ago. So that helped comps on the SG&A line year-over-year. But overall, I think we still expect the trend to be kind of a flattening and ultimately increasing of the SG&A line as we continue to invest in sales. And then some of the other support and transition cost we expect to incur related to the systems project as we move, especially into the second half of next year, we'll have that line tick up as well.

Operator

Our next question comes from the line of Andrew Steinerman with JPMorgan.

Molly R. McGarrett - JP Morgan Chase & Co, Research Division

This is Molly McGarrett for Andrew. Could you just break out the margin impact from the various expense buckets for third quarter? So the lower merchandise, energy and payroll cost.

Steven S. Sintros

We mentioned the energy, which was about 0.2 point, Molly. The merchandise was about, 7/10, I believe, I don't have the payroll in front of me but it was probably similar to the merchandise. I think we don't want to get into kind of breaking down every piece, but I know we've talked about the merchandise and we continue to talk about the energy. So I'm happy to provide that color. Merchandise is something we're continuing to watch. It was still a benefit for the quarter. But like I said in my comments, the infusion of merchandise was a little higher than expected during the quarter and something we're keeping an eye on.

Molly R. McGarrett - JP Morgan Chase & Co, Research Division

Okay. And can you also give an update, I know it's still early days, but on your thinking about the health care regulations and what kind of impact that could be going forward?

Ronald D. Croatti

I think, Molly, we're still in a -- we're still in discussions and really don't have a firm direction. We're working with a consulting company. And I really can't give you anything at this point. You want to add to that, Steve?

Steven S. Sintros

No. I think that with all the changes, there are new products, new options for companies emerging everyday and every month. And I think we're in the collection mode to figure out what options are available for us and our employees so we can continue to provide affordable health care for them at a reasonable cost to both them and the company. So as Ron said, I think, we're still in the evaluation stage. And I think, as we've mentioned in the past, our adoption of those regulations is a little on the later end because of our fiscal and benefit planned year. We are not required to comply until September of 2014, so not until our fiscal 2015 year. So we're looking in learning from others as they start to implement these rules.

Operator

Our next question comes from the line of Chris McGinnis with Sidoti.

Christopher McGinnis - Sidoti & Company, LLC

I just want to ask -- I guess just on the -- originally, on the $40 million investment for the CRM and the improvements on the infrastructure. Can you just maybe talk about the payback period you expect on that? And maybe how that impacts positively, maybe, '15?

Steven S. Sintros

Yes. I think as it relates to the systems project, there will be cost associated with the depreciation of the system when it goes live and some deployment in transition cost toward the later part of '14. Certainly, once it's deployed and settles down, there will be some positives from administrative cost reduction. And really, the largest benefit we expect to get from the new system is tightening up our service systems, improving customer satisfaction and ultimately our lost accounts, that's really the ultimate goal for the system. That's not going to be an immediate process. I'd hesitate to say in '15, you'll see the benefits come flooding in. I think it'll be something that as we deploy it and settle down the new system, it'll help us in the upcoming years. So it really is a long-term investment and a system that we expect to use for a long time.

Christopher McGinnis - Sidoti & Company, LLC

Sure. And then, I guess, if you are thinking of it that way, what -- in terms of when you were selecting it and looking at it, what was -- maybe the expected either gain on sales or however -- what are the big points that made you, obviously, it's going to provide a lot of efficiencies, but was it like an 8% ramp or...

Ronald D. Croatti

I think the efficiencies are not -- their important, I think, we'll get those. But the whole focus is on the customer, the customer retention side. I think we'll be able to improve our customer retention rather than a 8% or 8.5% that we normally lose today. I think we'll be able to make some good gains in that.

Christopher McGinnis - Sidoti & Company, LLC

Great. I appreciate that, Ron.

Ronald D. Croatti

That's really what it's going to come down to. There's just some competitive differentiator on the sales side. I mean, you got people having all the devices and so forth, this is coming out entirely different.

Christopher McGinnis - Sidoti & Company, LLC

And is that an upgrade even from the -- you mentioned it earlier just on the iPad switch over from the BlackBerry?

Ronald D. Croatti

Well, the iPad -- the sales force ring in for I don't know, 5 or 6 years on BlackBerry maybe. They now have iPad streaming videos. In the old days, we used to call it a brag book, that's now on the iPad form. There's a lot of stuff, there's a lot of streaming material right on there. Before you go in and see an account, you can refresh your memory on how to sell a house per count or whatever the case may be. And so that's a separate project and that's going to be an ongoing project. What we call Unity 20/20 is a service project, a billing project. We hope to have the most friendly bill, obviously, portals, obviously, electronic payment. The list is long in the changes that we're making.

Steven S. Sintros

And just to clarify, Chris. I think, Ron is alluding to the iPads are for our professional sales force, those who are out there now providing additional functionality. Unity 20/20 is for the service systems, the route drivers, the service management and have that service focus. So that's the difference.

Christopher McGinnis - Sidoti & Company, LLC

Sure. Now I appreciate and -- I guess, the important point is the 8% churn that you're talking about and trying to drive that lower, obviously.

Ronald D. Croatti

That's the whole thing.

Christopher McGinnis - Sidoti & Company, LLC

Just on the fire retardant. Obviously, it was a driver of the last number of years for the industry itself. Can you just maybe talk about where that's growing? And you mentioned energy is, obviously, one of the tougher comps.

Ronald D. Croatti

I think we're primarily in that, I guess, you can call it excess Oklahoma area. And it was very good for us all this time, Louisiana, Texas. We are not in North Dakota. So we have seen a general slowdown on the energy side, probably in the last 6 months.

Steven S. Sintros

And I think, again, it's a slowdown but it's also just tougher comps. We were growing in that product line significantly over the last 2 or 3 years. The growth in that product line is probably still higher than our average, but it is moderating.

Christopher McGinnis - Sidoti & Company, LLC

Sure. I was wondering if its still growing or if that's starting to. I knew it was solid comps.

Steven S. Sintros

It's still growing.

Ronald D. Croatti

It's still growing.

Christopher McGinnis - Sidoti & Company, LLC

And then maybe, just lastly on kind of the consolidation in the industry. Any changes? It seemed like you were a little more positive last quarter, maybe how do you feel now and is there anything in the environment that makes a change to maybe improve in your favor?

Ronald D. Croatti

No. I'd say, still consolidation is based, basically, on family issues in the smaller companies, some of the regional chains. We talk to them all the time, but that is all I can tell you.

Operator

Our next question comes from the line of Andrew Wittmann with Robert W. Baird & Co.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

I guess, I want to build on that last one. Just looking at the balance sheet, another quarter, a little bit more cash. Ron, do you think about redeployment options? Is that -- I know I sound a little bit like a broken record on this one, but is there any change in your level of motivation to do something with this cash today versus a year ago? And how do you think about maybe about returning some of that to shareholders?

Ronald D. Croatti

Number one, I think, we have the use for the cash. We have some stuff in the pipeline, whether they'll materialize, I don't know at this point. But we've been working the acquisition targets harder the last 6 month than we had the previous year. So I'm confident that we will come up with something in the year. So that's where the cash is going to go. And we're using a lot of cash in this even though it's going to be depreciated. I mean, our Unity project is an expensive project.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Yes. Just in terms of, Steve, maybe on the notes that come due this fall. Just thinking about pay that off with cash on hand there and then put that in the revolver, and do you see yourself in the debt markets?

Steven S. Sintros

No. I think we're looking a hard look at the debt markets. Obviously, rates are attractive and I think, longer term, I think we want to keep the capacity to look at acquisitions. And potentially if they don't materialize, look at other options for the deployment, as you mentioned.

Operator

Our next question comes from the line of Dan Dolev with Jefferies.

Dan Dolev - Jefferies & Company, Inc., Research Division

Can you please quantify the impact of, the exact impact of revenues from collection this quarter and how you trended versus last quarter? And then also the revenue from the buyout this quarter and then how it trended from the last quarter, specifically on the Laundry and the Core Laundry business?

Steven S. Sintros

So Dan, I think when you're talking about the merchandise recovery charges, which is something we alluded to, we don't break out that level of granularity with our revenue and the different components. When you're talking about the merchandise buyout, we had a merchandise buyout last quarter that we specifically called out, it was about $2.2 million last quarter and that did not reoccur again. That was a specific situation with a particular customer, which we called out last quarter and that did not repeat in this quarter.

Dan Dolev - Jefferies & Company, Inc., Research Division

Understood. And then I just have one follow-on question. It seems like in the past 3 years, your growth has been in the high-single digit in the Core Laundry business. And now we're looking more in the mid-single digit. Is it something we should be expecting over the next few years or is there a structural decline in the growth or is it just because of the bad economy? I'm just trying to understand why the growth has decelerated from those high levels to a more modest level?

Steven S. Sintros

Yes. We've been talking about it for, really, the last 8 or 9 -- or 9 months or so. And there's been several reasons why our growth has been higher than either the industry average or what you might expect in a not that great of an economy. We talked a little earlier in this call about the boom in flame-resisting garments and energy exploration in different parts of the country, which we participated fully in. We're very strong in those parts of the country. That product line has grown substantially over the last few years. We've talked about the strength in our National Account sales, where we've done a better job participating in large account sales, maybe than we have in the past. We talked about the pricing environment. We think we've done a good job continuing to push price with our customers. And included in that is making sure we execute on the recovery of extra charges when it's warranted. So these are the improvements that we feel that we've made, some of them structurally. But now we're dealing with tougher comparisons, and some of those things are starting to slowdown. The Flame Resistant growth is certainly moderating. And some of the improvements we've made in other areas are moderating at a higher level. And I think that growth, and some of those things, have helped lead to our higher margins in the last couple of years. But from a growth standpoint, we're starting to annualize some of those improvements. And so we've made the comment for the last couple of quarters now that, yes, for the next couple of years, we think that mid-single-digit growth, absent acquisitions or uptick in the economy, where we can really see some pull from wearers, is more of a reality.

Operator

[Operator Instructions] Our next question comes from the line of Kevin Steinke with Barrington Research.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Steve, I just had a follow-up question on the higher-than-expected investments in merchandise in the quarter that you referenced. Do you have any additional clarity on what might have driven that?

Steven S. Sintros

Well, yes. It's just that -- as you're aware, I mean, we have over 200,000 customers we continue to invest merchandise on a day-to-day basis. A portion of those merchandise additions relate to new accounts. But really, the larger portion relate to just replacement of garments in our customer base, whether it's just garments have worn out, customer need a new image and we're renewing a contract and redressing the account, so there's a number of different areas that drive that merchandise investment. The level of that investment ebbs and flows. And it can ebb and flow for a number of different reasons. I'm not sure I can give you too many specifics on exactly why over the last couple of months it ran a little higher. As I alluded to, it typically does in the springtime a little bit. But we thought that the investment was a little higher than expected and something that was worth watching and mentioning. Sometimes competitive pressures in certain markets can lead to more uniform investment, as competitors are calling on accounts and offering to provide the service for price incentive and redress with the new uniform program. So those things are the things we address location via location, market by market. So I'm not sure I have a silver bullet to tell you why they were a little higher the last couple of months. But it was something we thought worth mentioning.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay. I appreciate that, that's helpful. And when you're discussing CapEx, you talked a little bit about, you've made some updates to laundry plants and you're going to continue to do that. Is there anything that could move the needle materially in terms of improving productivity of plants and perhaps, benefiting margins in the future? Is that just kind of an ongoing reinvestment that's just kind of your continual improvement process?

Ronald D. Croatti

Well, the technology improvement in the facilities is ongoing. It's just the way we're doing the plants that we're replacing, where older plants became an acquisition. So technology is our key. We keep putting in automotive equipment, automated sortation, most up-to-date equipment we can get our hands on, software. So that's going to be a continual investment and obviously, there's a payback.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay. Good. And sorry if I missed this. But just the outlook on the Specialty Garment segment being a little weaker than expected in the fourth quarter. Is that just due to a lighter overall activity or is it the push forward of projects that you expected that are now going to, maybe, come later. How do you see that playing out? I know it's kind of difficult to predict quarter-to-quarter, but any additional color, please.

Steven S. Sintros

Yes. Yes, it's a little bit of both. I think we expected a little heavier spring out each season and then materialize. There were some projects that were scheduled for the fourth quarter, if you look at our last year fourth quarter. Fourth quarter is typically down for this segment. We expect that this year's to be a little bit better than last year's, as a result of some projects particularly in Europe that were scheduled to come in. Those are now delayed. Some of them indefinitely, some of them have been pushed out and may land in the early part of next year. So it's really a little bit of everything that you mentioned and they came in a little short.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Okay. And last one for me is, as you look to fiscal 2014, and I know you're not providing guidance at this time, but I believe you talked about last quarter operating margins, perhaps, peaking in the near term in fiscal 2013. Is that still how you're thinking about things as we move into fiscal '14?

Steven S. Sintros

I think so. The guidance assumes we kind of end this year pretty close to 14% operating margin for the laundries, anyway. And looking back, that's pretty much as high as we've been. Now merchandise is a key element to that. That's why I've signaled it's something we're keeping an eye on. We'll have a better idea next quarter when we give our guidance what we think for next year. But I think, we'll work to hold that margin, but there are some things that, with the investments we're making in the short term, may pressure that. And so I think we feel the same as we did last quarter. It's something we're continuing to work on holding.

Operator

There are no further questions registered.

Ronald D. Croatti

We'd like to thank you, all, again, for the interest in our company and look forward to speaking to you in the fall, when we're reporting on UniFirst's Fourth Quarter and Year-End Results for Fiscal 2013. Thank you, and have a great day.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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