Vestis Corp. downgraded by S&P Global due to weaker performance outlook

Investing.com -- S&P Global Ratings has downgraded Georgia-based uniform rentals and workplace supplies provider, Vestis Corp., to ’B+’ from ’BB-’ due to a weaker than expected performance outlook for the third quarter of fiscal 2025. The company’s downgrade follows its decision to withdraw full-year guidance and switch to a quarterly revenue outlook.

The revised rating is a result of lost business, lower customer volumes, and ongoing service issues which could impede the company’s growth plans. S&P Global Ratings has also adjusted its issuer credit rating for Vestis Corp., citing expectations that leverage will remain above the 4x downside threshold. The negative outlook reflects the potential for further downgrades if the company fails to improve its performance due to challenges such as weak new customer wins or high attrition rates.

Vestis Corp. has experienced a continued revenue decline in the first half of 2025, unable to secure sufficient new business to offset lost clients. While customer retention has improved compared to last year, the current 12-month retention of 92.4% is still weak compared to large competitors due to ongoing service quality issues.

The company has struggled with service quality problems, including timeliness and completeness of delivery services, leading to the issuance of credits to appease its customers. These issues, which are proving more difficult to address than initially thought, have led to a revised revenue forecast for a 2.6% decline in 2025, compared to initial expectations of flat growth.

Furthermore, Vestis Corp. has seen a reduction in its credit metrics cushion for the current rating, and a failure to execute a turnaround could lead to another downgrade. One-time costs in 2025 have impacted EBITDA and will lead to a spike in leverage. These costs include a $15 million bad debt expense and a $10 million severance charge due to executive departures, as well as gross margin compression due to a lower revenue base and a mostly fixed cost of services.

The company’s performance challenges are also expected to result in weaker free cash flow in 2025, exacerbated by a $30 million investment in inventory to support new customer installations, improve service efficiency, and avoid tariffs. In response, Vestis has suspended all dividends and share repurchases to focus on deleveraging, a move viewed as credit positive by S&P Global Ratings.

However, the macroeconomic environment adds additional uncertainty to Vestis’ ability to meet forecasts. S&P Global recently revised its forecast for economic growth downward and predicts a 35% chance of a recession starting within the next 12 months. Vestis’ exposure to small- and medium-sized businesses makes it susceptible to macroeconomic trends, which could result in lower customer demand or client losses and increased pricing pressure.

The negative outlook reflects the possibility that Vestis’ performance could deteriorate beyond the base case within the next 12 months due to continued performance challenges and a difficult macroeconomic environment. S&P Global Ratings could lower ratings on Vestis if it expects the company will sustain leverage at or above 5x. This could occur due to additional customer attrition, faltering sales activity, or ongoing service quality issues restricting its ability to recover profit margins.

On the other hand, the outlook could stabilize if Vestis improves customer retention and strengthens new business wins, resulting in consistent revenue growth and an expansion of profit margins in line with forecasts, demonstrating improving service quality.

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