Sodexho Marriott's strong profit performance buoys stock

Nation's Restaurant News, Oct 26, 1998 by Paul King

BETHESDA, Md. -- Sodexho Marriott Services Inc. achieved a high passing grade on its first-year financial report card as a new company, with an 86-percent rise in pro-forma net income and about $200 million in increased sales for fiscal 1998.

For a 22-week business period ended Aug. 28, net income was $5.1 million, or 8 cents per diluted share, compared with a pro-forma net loss of $2.2 million in the comparable fiscal 1997 span, or a net loss of 4 cents per diluted share.

Sales for the period ending Aug. 28 amounted to $1.7 billion, 5 percent higher than the results for the same period a year ago as if the two merged entities had been a single business at that time.

The unusual 22-week scorecard, released Oct. 8, was a result of a change in the company's fiscal year. Sodexho Marriott Services was created last March 27 from the merger of Marriott Management Services and Sodexho USA. Shortly after the merger was completed, the company's board of directors changed its fiscal year from a calendar year to one ending in August. The change in the fiscal year created a "stub" earnings period that was combined into 22 weeks.

On a 12-month pro-forma basis, net income for fiscal 1998 was $32.7 million, up 86 percent from net income of $17.6 million in the previous year. The strong profit performance generated earnings per share of 52 cents compared with previous-year earnings of 28 cents a share. Revenue for the year was up 5 percent, to $4.3 billion, from $4.1 billion.

Sodexho Marriott was buoyed not only by the positive earnings report but also by a recent report by Lehman Brothers' analyst Mitchell Speiser. In initiating coverage of the contract company, Speiser gave Sodexho Marriott an "outperform" rating.

"We expect that Sodexho Marriott will benefit from the trend in outsourcing that is taking place in the highly fragmented health care, education and corporate markets," Speiser said.

Speiser said he expected Sodexho Marriott would do "even better" over the short term. He projected its stock would earn $35 a share within 12 months.

For the third quarter Sodexho Marriott's stock was one of just five stocks in the Nation's Restaurant News Index of 115 companies that were able to show growth in their per-share price over the second quarter. The stock gained $1 a share, or 3 percent, moving to $30 from $29 in the previous quarter. For the year to date through Sept. 30, the stock was up 7 percent, from a price of $28.13 per share on Jan. 1. As of Oct. 15, the contractor's stock was selling at just under $29 a share.

Sodexho Marriott chief executive Chuck O'Dell said his staff is not daunted by lofty expectations of the financial community, and he used an analogy of two triangles representing the company's constituency and its keys to success.

"We have shareholders, employees and clients, each with an expectation of us: They want to see performance," he said. "I believe that if we stayed focused on three key points - retaining accounts, signing new business and building sales within existing accounts - they'll all be happy with us."

O'Dell noted that much of Sodexho Marriott's growth came from the education and corporate markets, while sales were much softer for the healthcare division. Corporate Services, the largest division, grew by more than 7 percent, to $581.1 million, for the 22-week earnings period. Education - colleges and universities grew by 5.7 percent, and school support services gained nearly 11 percent in revenue over the 1997 results. By contrast, health care rose by only 2.3 percent, to $545.4 million, for the 22-week period.

"Health care has been a softer division for us so far this year because of that market's challenging economic climate, but also because of a lot of movement on the part of clients," O'Dell explained."

O'Dell said new products are being prepared for launching in the health-care arena, both on the food side and in Sodexho Marriott's burgeoning area of facilities management, that could help shore up existing health-care accounts.

Facilities management the oversight of nonfood areas, such as housekeeping, engineering and laundry -- is a growth area Sodexho Marriott hopes to rely on for a larger percentage of business, particularly in the health-care market. However, O'Dell said the company is not sacrificing food as it builds the nonfood arena.

"[Marketing vice president] Tony Wilson and his staff are focusing more on food than ever before, and we have a larger staff working on the food side than in the past," he explained. "We have new components to Crossroads Cuisine being rolled out, and Crossroads is moving beyond the corporate market into health care, so in that area alone we have a lot of activity on the food business.

"As an outsourcing company, I know we also have to have pre-eminent core competencies," he said. "Our core functions will be food, engineering and integrated management. As for other functions, such as housekeeping, security and parking, we can decide over time whether to subcontract those, enter into a partnership with another company or simply do them on our own.