Earnings Call Transcript
CINTAS CORP (CTAS)
Earnings Call Transcript - CTAS Q1 2020
Operator, Operator
Good day, everyone, and welcome to the Cintas Quarterly Earnings Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Mike Hansen, Executive Vice President and Chief Financial Officer. Sir, please go ahead.
Mike Hansen, CFO
Thank you, and good evening. Thanks for joining us. With me is Paul Adler, Cintas' Vice President and Treasurer. We will discuss our first quarter results for fiscal 2020. After our commentary, we will be happy to answer questions. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigation for forward-looking statements. This conference call contains forward-looking statements that reflect the Company's current views as to future events and financial performance. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the SEC. Revenue for the first quarter of fiscal '20 was a record $1.81 billion, an increase of 6.7% over last year's first quarter. The organic growth rate, which adjusts for the impacts of acquisitions, foreign currency exchange rate fluctuations and differences in the number of workdays, was 8.3%. In the first quarter of fiscal '20, the organic growth rate for the Uniform Rental and Facility Services operating segment was 7.5%, and the organic growth rate for the First Aid and Safety Services operating segment was 13.8%. Gross margin for the first quarter of fiscal '20 of $849.1 million, increased 9.6%. Gross margin as a percentage of revenue was 46.9% for the first quarter of fiscal '20, compared to 45.6% in the first quarter of fiscal '19. Uniform Rental and Facility Services operating segment gross margin as a percentage of revenue improved 150 basis points from last year's first quarter to 47.2%. And the First Aid and Safety Services operating segment gross margin percentage improved 110 basis points to 49%. Reported operating income for the first quarter of fiscal '20 of $306.1 million increased 15.4%. Operating margin was 16.9% in the first quarter of fiscal '20, compared to 15.6% in fiscal '19. Operating income in the first quarter of fiscal '19 was negatively impacted by integration expenses related to the G&K acquisition by $4.9 million, or 30 basis points. Reported net income for the first quarter of fiscal '20 was $250.8 million, and reported earnings per diluted share for the first quarter of fiscal '20 were $2.32. Excluding the G&K acquisition integration expenses in fiscal '19, EPS increased 20.2%. As our Chairman and CEO, Scott Farmer was quoted in today's press release, we are pleased with our start to our fiscal year. We thank our employee-partners for continuing to execute well on our important initiatives. Before turning the call over to Paul for more details, I'll provide an update of our fiscal '20 expectations. We expect revenue to be in the range of $7.28 billion to $7.32 billion. We expect EPS to be in the range of $8.47 to $8.57. Note the following regarding the guidance. The growth rate at the revenue guidance range is 5.6% to 6.2%. However, our fiscal '20 contains one less workday than our fiscal '19. Adjusting for this one day difference, on a constant workday basis, the revenue growth rate at guidance is 6% to 6.6%. One less workday also has a negative impact on EPS reducing it about $0.06, which is a 90 basis point drag on the EPS growth rate for the year. The guidance assumes an effective tax rate for fiscal '20 of 20.3% compared to a rate of 19.7% for fiscal '19. The higher effective tax rate in fiscal '20 negatively impacts EPS growth about 80 basis points and total EPS by about $0.06. Keep in mind that the tax rate can move up or down from period to period, based on discrete events including the amount of stock compensation expense. The guidance assumes a share count for computing EPS of 109 million shares. This consists of diluted weighted average shares outstanding, plus participating securities in the form of restricted stock. And it does not assume any future share buybacks, any potential deterioration in the U.S. economy or any additional G&K integration expenses. I'll now turn the call over to Paul.
Paul Adler, VP and Treasurer
Thank you, Mike. Please note that our fiscal '20 contains one less workday than in fiscal '19. One less day will negatively impact fiscal '20 total revenue growth by 40 basis points. To illustrate the magnitude of the headwind using fiscal '19's annual revenue, one less workday equates to about $27 million. One less workday also has a negative impact on operating margin and EPS. Fiscal '20 operating income margin will be reduced by about 12.5 basis points, in comparison to fiscal '19 due to one less day of revenue. The negative impact on the margin occurs because certain expenses like amortization of uniforms and entrance mats are expensed on a monthly basis as opposed to on a daily basis. And we will have one less day of revenue to cover the expenses. As Mike stated, one less workday is a headwind of about 90 basis points on EPS growth, and about a $0.06 drag on total EPS in comparison to fiscal '19. Each quarter of fiscal '20 will contain 65 workdays. In comparison to fiscal '19, our upcoming Q2 of fiscal '20 will have the same number of days. Q3 will have one additional day, and Q4 will have one less day. Please keep the quarterly day differences in mind when modeling our fiscal '20 results. We have two reportable operating segments: Uniform Rental and Facility Services and First Aid and Safety Services. The remainder of our business is included in All Other. All Other consists of Fire Protection Services and our Uniform Direct Sale business. First Aid and Safety Services and All Other are combined and presented as Other Services on the income statement. Uniform Rental and Facility Services operating segment includes the rental and servicing of uniforms, mats and towels, and the provision of restroom supplies and other facility products and services. The segment also includes the sale of items from our catalogs to our customers on route. Uniform Rental and Facility Services revenue was $1.45 billion, an increase of 5.8%. Excluding the impact of acquisitions, foreign currency exchange rate changes and differences in the number of workdays, the organic growth rate was 7.5%. Our Uniform Rental and Facility Services segment gross margin was 47.2% for the first quarter compared to 45.7% from last year's first quarter, an improvement of 150 basis points. Energy expense as a percentage of revenue was 2.20% compared to 2.45% in the prior year quarter. The gross margin expansion was driven in large part by the strong revenue increase covering certain fixed production and service department costs. Our First Aid and Safety Services operating segment includes revenue from the sale and servicing of first aid products, safety products and training. This segment's revenue for the first quarter was $172.1 million. The organic growth rate for this segment was 13.8%. The First Aid segment gross margin was 49.0% in the first quarter compared to 47.9% in last year's first quarter, an increase of 110 basis points. First Aid segment gross margins continue to increase with strong top line growth. Our Fire Protection Services and Uniform Direct Sale businesses are reported in the All Other category. Our Fire business continues to grow each year at a strong pace. The Uniform Direct Sale business growth rates are generally low single digits, and are subject to volatility, such as when we install a multi-million dollar account. Uniform Direct Sale, however, is a key business for us, and its customers are often significant opportunities to cross-sell and provide products and services from our other business units. All Other revenue was $184.5 million, an increase of 8.8%. The organic growth rate was 9.7%. The Fire business organic growth rate came in at 12.5%. Uniform Direct Sale business had a good quarter too, posting an organic growth rate of 5.8%. All Other gross margin was 42.8% for the first quarter of this fiscal year, compared to 42.9% for last year's first quarter. Selling and administrative expenses as a percentage of revenue were 30.0% in the first quarter of fiscal '20, and 29.7% in the first quarter of '19. Lower labor expense as a percentage of revenue was offset by increases in other expenses, particularly an 80 basis point increase in medical expense. We are self-insured and therefore subject to some volatility in medical expense from quarter to quarter. Our effective tax rate on continuing operations for the first quarter of fiscal '20 was 10.1%. Stock-based compensation positively impacted the tax rate. As Mike stated earlier, the tax rate can move from period to period, based on discrete events including the amount of stock compensation expense. Please note three new line items on our balance sheet, resulting in an increase in assets and liabilities by about $165 million. These relate to our adoption in the quarter of the Accounting Standards Update 2016-02, entitled Leases. The adoption does not have a material impact on net income or cash flow. Our cash and equivalents balance as of August 31 was $102.1 million. Operating cash flow in the first quarter of fiscal '20 increased about 70% from the amount of operating cash flow in the first quarter of fiscal '19, and benefited from strong earnings growth and improvements in working capital. Capital expenditures in the first quarter were $64.7 million. Our CapEx by operating segment was as follows: $53.0 million in Uniform Rental and Facility Services, $8.1 million in the First Aid and Safety, and $3.6 million in All Other. We expect fiscal '20 CapEx to be in the range of $280 million to $310 million. As of August 31, total debt was $2,876.9 billion. $2,538.1 billion was fixed interest rate debt, and $338.8 million was variable rate debt in the form of a term loan and commercial paper. At August 31, our leverage of 1.9x debt-to-EBITDA was slightly lower than our target of 2x. That concludes our prepared remarks. We are happy to answer your questions.
Operator, Operator
And our first question will come from Toni Kaplan with Morgan Stanley.
Toni Kaplan, Analyst
The Uniform gross rental margins were really strong this quarter expanding by about 144 basis points. Was there anything one-time in there, or I guess how much could be attributable to synergies? And how should we think about the pacing of synergies this year?
Mike Hansen, CFO
Nothing really one-time. We did, as Paul mentioned, we got a little bit of a benefit, 25 basis points from energy. So we got a little bit of benefit there. The synergies - our expectation is that they will be generally consistent from quarter to quarter. So call it roughly $35 million. If that happens, that will get us right through that $140 million for the year, which we talked about a few months ago. We're going to be right around that range, $135 million to $140 million. And so we feel pretty good about our ability to capture those synergies. I would say the rest of it is nice execution, getting through a little bit more of the integration activities and seeing some efficiencies at play. The environment for pricing was similar to the fourth quarter where we sat a bit incrementally better than we had seen. So we got a little bit of revenue help from that standpoint as well but not really any one-time items.
Toni Kaplan, Analyst
And now that you've reached your target leverage, can you talk a little bit more about what you would look for in an acquisition? Would you prefer sort of domestic or international for uniform versus ancillary services? And lastly would you expect any regulatory issues just given your size at this point?
Mike Hansen, CFO
So from an M&A perspective, we love M&A in the businesses that we're currently in certainly. Anything from a tuck-in in our Fire, First Aid and Uniform Rental businesses to something larger. We certainly, if there were any M&A opportunities in our space, we would certainly want to be involved and would have a great interest in pursuing that at the right value. And we certainly, from a geographic standpoint, prefer acquisitions where we can capture better synergies. It's easier to do so with acquisitions in the U.S. and Canada because we have a presence here, and it allows us to get density in markets to combine capacity if those opportunities present themselves. Your last question about regulatory issues certainly depends on the type and size of acquisition, but, let's assume a large acquisition in the workwear space, for example. If one came available, we'd love to take a look at it. And something that you may not be considering is, we have so many people who look at our business from a served market perspective. We view the market as being so much bigger than that. For example, we compete in the workwear space; there is a lot of competition in the workwear space. Some of our competitors are retail competitors, such as Walmart and Amazon, who each sell over $5 billion annually of workwear. So they are large competitors in the space. There are other competitors that provide workwear with design and shipping capabilities. We happen to provide workwear through managed programs where we source, deliver, and maintain, and launder for our customers. So there is a lot of competition in the space. Over 60% of our new business comes from non-programmers. These are retail space and direct sellers who are customers doing it themselves. We've shown year after year that that is part of our market space. We can also lose business to those non-traditional competitors. The opportunity is significantly larger than our served market. If there is an opportunity that's large in our space, we certainly would have interest, but it would need to be at the right value, and we'd have to articulate that competitive set, which we believe is quite large.
Operator, Operator
Our next question comes from Manav Patnaik with Barclays Capital.
Manav Patnaik, Analyst
My first question is obviously, the first quarter growth was pretty impressive and well above your full-year guidance ranges, I guess. Could you just help us maybe walk through, if there are any quarterly cadences that we should be looking at?
Mike Hansen, CFO
Well. Sure. So maybe we'll start with the first quarter. We did have a really nice first quarter. Our non-rental businesses performed really well. Paul, maybe you can give a little bit more color on those businesses.
Paul Adler, VP and Treasurer
Yes, sure, Manav. So let's start with First Aid. We mentioned the organic growth at 13.8%. That's a business that has executed very well. We typically expect organic growth to be in high single digits; maybe 10% is what we've talked about for that business. So they came in a little bit stronger. Of course, there are a lot of blocking and tackling and many variables that go into performance in the quarter. Notably, we had a new item that we rolled out in the quarter, like a rollout of a direct sale program in our Uniform Direct Sale business, where you're putting that into cabinets, and you get a lot of revenue as a result. You're counting on some smaller trail of that revenue going into the lapping quarter. So it gave a little bit of a boost due to that new product rollout, and the outlook for First Aid is going to be continuing to have a great year, but probably for the latter quarters more in the high single digits, where we have historically been. The Fire business impressive organic growth rate of 12.5%. Again, a lot of pieces to that with execution of the sales force and great quality service. They did have a little bit of an easier comp, Manav. Their growth rate a year ago was about 8%, so a little bit higher than 8%. Some of the 12.5% was partially due to that easier comp. In the Fire business, we have two types of revenue streams: test and inspection, which is more recurring revenue and troubleshooting when things break. We had some national account repair and maintenance type revenue in the first quarter that was larger than we expected, and we don't expect that to repeat. Rounding out the other business units, the Direct Sale business had a decent growth rate of 5.8%. Last year, that growth was weak, with a shrinkage of about 1.8%. It's a business that I think benefited from that easier comp in the first quarter. And as previously stated, the Direct Sale business is typically a 3% grower long-term.
Mike Hansen, CFO
Yes. So, Manav, when you look at performance, I would say the non-rental businesses had a great quarter; maybe outperformed our expectations a little bit, and we probably don't expect that going forward. From a rental perspective, again had a really nice quarter with strong execution by our rental partners. I mentioned a little bit about the pricing, which was similar to the fourth quarter, which was incrementally good. We probably got a little bit of a year-over-year benefit because last year in the first quarter, that was our lowest organic growth. So our volumes were still kind of finding the bottom. Overall, we don't expect a lot of inconsistencies in terms of growth looking to the next three quarters.
Manav Patnaik, Analyst
And then if I could just ask about the G&K revenue synergies. I know you're not looking to quantify anything. But any anecdotal color on whether you're starting to see that as a needle mover in terms of your results?
Mike Hansen, CFO
Well, we started talking about this a little bit. We saw signs of benefit in the first quarter of last year, and saw some nice execution throughout last fiscal year. So we did see benefits throughout last year and saw a little bit of that in the first quarter. As we move forward, I don't expect anything significant; however, we engage with those customers on a weekly basis, educating them on what we do. Sometimes these take time. We're going to continue to cultivate those relationships. I wouldn't expect any significant amounts in any one particular quarter. But it is certainly a nice benefit for us.
Operator, Operator
Our next question will come from Kevin McVeigh with Credit Suisse.
Kevin McVeigh, Analyst
At this point, given the gross margins, is it fair to say – and I know we’re not just inquiring about G&K – but is G&K up to the corporate average at this point, or would you expect that to continue to narrow relative to where Cintas is relative to G&K?
Mike Hansen, CFO
Well, as you referred to, it's really hard to say. For example, a lot of that G&K volume resides in legacy Cintas locations. It certainly helps us in those locations by creating more capacity utilization and a bit more density. There certainly is a benefit there. Many standalone locations have inherited some legacy Cintas volumes, but they're not quite to where we would see the rest of the Cintas legacy locations. We hope to continue seeing improvements as we progress.
Kevin McVeigh, Analyst
And then just with the benefit from energy, was there any organic growth headwind, i.e., would there have been maybe a benefit last year from surcharges, and you don't have those surcharges, or would it have all been on the expense side?
Mike Hansen, CFO
We started to see a bit of softening towards the end of the first quarter in the energy space. Keep in mind, it's not a big part of our revenue base, but we started seeing a bit of softness. I would say there was no headwind in the quarter from a revenue perspective, but we're keeping an eye on it moving into the second quarter and beyond.
Operator, Operator
Our next question comes from Gary Bisbee with Bank of America Merrill Lynch.
Gary Bisbee, Analyst
I guess you sort of alluded to this earlier in the commentary about some of the places where you saw strength this quarter, but clearly in the Rentals business you had a much easier comp on both organic revenue and margins in the year-ago. I just wanted to ask, is it right to think that that is a portion of the rentals business improvement and may be more significant than any sort of sequential improvement in momentum relative to what you were seeing this past spring? Is that fair?
Mike Hansen, CFO
So in other words, yes. Gary, your comment about experiencing a year-over-year benefit is accurate. There was a little bit of that, as I mentioned earlier, because we were at our lowest organic growth in rental last year, so that contributed as well.
Gary Bisbee, Analyst
Just thinking sequentially as we've moved over the last few months. Are you hearing anything different from your clients in the U.S. and Canada around the macro backdrop? Some forecasts for GDP growth in the U.S. are moderating, some industrial activities moderated a bit. But any change in dialogue or is it really steady as she goes?
Mike Hansen, CFO
Yes. We haven't heard much from our customers, and our first quarter results would indicate that. While we think about the economic picture as we move into the last two quarters of our fiscal year, we do consider the noises around interest rates, trade and tariffs, and the upcoming election year, leading us to approach things with a little more caution compared to earlier in the summer. While we have not seen much change from our customers yet, we are keeping our eyes open because there is a lot of noise in the present environment.
Gary Bisbee, Analyst
Just lastly, can you give us a sense of how much of the All Other segment is Fire versus Uniform sales? Many have plugged in low single-digit growth for a while because uniforms were always bigger, but it sounds like Fire is growing. Is it possible, given the volatility quarter-to-quarter, that it should be a mid-single-digit grower, all in given that Fire is growing quickly and Uniform fairly moderately? Is that a fair assumption? And if you could give us the mix, that would be great. Thank you.
Paul Adler, VP and Treasurer
Gary, it's Paul. I think that even in our 10-K, we actually have to provide more detail because of the revenue recognition adoption of FASB. So you can take a look at the last 10-K for specifics. My recollection is that Fire is about 55% of the mix at this time, and 45% is the Direct Sale business. The Fire business typically grows in high single digits or 10% organic, while the Direct Sale business typically grows around 3%. The Fire business had a strong quarter with improved gross and operating margins, but since we lump these figures together for accounting guidance, it might have caused a slight shrinkage in gross margin due to the mix shift. If you analyze these two businesses separately, the Fire business saw an increase in their margins.
Operator, Operator
Our next question comes from Seth Weber with RBC Capital Markets.
Seth Weber, Analyst
I wanted to ask about working capital; it came down nicely relative to the first quarter last year. Do you think you can kind of flip the negative? I think it was 2.60 or 2.75 or so for 2019. Do you think you can flip that all the way back to par this year? Or can you just talk to how you're thinking about working capital for 2020? Thanks.
Mike Hansen, CFO
Yes, when we think about working capital, we expect to use some working capital when we're growing. For example, if we're growing at our desired rate, accounts receivable will grow, inventories will increase, and in-service inventory will grow as well because we're injecting new inventory into both new and existing customers. In a growth environment, some use of working capital is typical. Last year, our use of working capital was notably higher during the first quarter due to system integration and the G&K integration processes, which caused disruptions in our accounts receivable environment. We feel confident in our positioning today. Compared to the previous year, we experienced a more stable operational flow in the first quarter. However, we would continue utilizing working capital as long as we maintain growth.
Seth Weber, Analyst
So the balance of the year probably looks something like the balance of 2Q through last year then? Is that a fair way to think about it?
Mike Hansen, CFO
Seth, I don't have the balance of last year right in front of me, but generally speaking, yes. We wouldn't expect anything disruptive in those areas.
Seth Weber, Analyst
And then just follow up on the SG&A; I appreciate you pointing out there were some extra expenses there for the quarter. Would you expect, assuming those don't recur, for SG&A to be down year-over-year for the rest of the year?
Mike Hansen, CFO
That certainly is our expectation. From a self-insurance standpoint, we've had quarters in the past where we saw one-time claims pop up and it resulted in elevated medical expenses. Those may occur again, but overall, we expect to see some leverage in SG&A, particularly from the G&A side. Paul mentioned that G&A labor was down a little, and we are very pleased with that. Overall, though, we anticipate disruptions from quarter to quarter; however, we do expect progress.
Seth Weber, Analyst
And just one last one for Paul, is the tax rate kind of consistent here then for the balance of the year just spread evenly 2Q to 4Q?
Paul Adler, VP and Treasurer
Yes, that's reasonable, Seth, but Q1 is an outlier due to stock option exercises. So that should be considered for modeling the remainder of the year.
Operator, Operator
Our next question comes from George Tong with Goldman Sachs.
George Tong, Analyst
Going back to organic revenue trends. How much of the acceleration in the quarter would you say is due to traction with the penetration of the no-programmer market versus improving adds, stops or easing competitive trends that you're seeing?
Mike Hansen, CFO
Yes, George, not a lot of difference from a normal quarter. Our new business continues to be strong, and the productivity of our reps was excellent. Within that, we saw good performance from no-programming. New business continues to lead growth efforts, while adds and stops are stable. Pricing helped a little quarter-over-quarter, and we had nice sales productivity alongside excellent execution from our partners.
George Tong, Analyst
Your gross margins are continuing to improve across your segments. Can you elaborate on how your input costs are evolving and what your latest thoughts are around the impact of trade negotiations on the business?
Mike Hansen, CFO
From a materials cost standpoint, we haven't seen a lot of change right now. The trade and tariff conversation is currently more speculative than impactful, but it's generating noise and uncertainty for our customers and us. Most of our material costs are amortized over significant periods, so that helps smooth those costs. Still, I would say there are no material costs to report regarding increased labor pressures in this quarter.
Operator, Operator
Our next question comes from Andrew Wittmann with RW Baird.
Andrew Wittmann, Analyst
I just had a couple of clarifying questions here. First just on the guidance; I think you guys—obviously, the tax rate was low. We expected it to be low. I don't think you guys expected it to be quite this low. I'm just wondering how much of the tax rate was incremental or part of the guidance raise just to tease that element out of the total rates here versus your prior expectation?
Mike Hansen, CFO
Yes, I would say in the quarter it was about a $0.06 impact, for the year, probably about a $0.08 impact. Much of that impact is somewhat outside our control. The equity piece of it played a role in the first quarter here.
Andrew Wittmann, Analyst
And then just on SAP, in the past, you've talked about how well rolled out or how thoroughly rolled out that is. Can you just kind of update us as to where we were either at the end of the quarter or where we stand today, Mike?
Mike Hansen, CFO
Yes, Andrew. We are about 75% of the way complete now. We're still on track to finish that implementation by the end of the fiscal year.
Andrew Wittmann, Analyst
And then you did quite a bit of buyback in the quarter. Can you give the total number of shares that you bought in and how much is remaining on the authorization that you currently have in place?
Mike Hansen, CFO
Yes. During the quarter, we have $263 million left on the authorization. We bought 837,000 shares for just under $200 million. Keep in mind that all of that purchasing was done prior to our July call. So it didn't factor into the guidance that we provided today.
Andrew Wittmann, Analyst
And just the only other question I had was specific around labor. You talked about SG&A kind of labor savings, but in the gross margin in the plant, this has been an area that's been cited maybe more by some of your competitors, but you guys have talked about it a little bit as well. I was just wondering if there are any changes that you've seen in the marketplace for your plant-level labor and how you're dealing with that today, if there is something to be dealt with?
Mike Hansen, CFO
You're right. We’ve talked a bit about pressures in pockets in the production and plant environment. I would say we didn't see much of a change. It continues to be a competitive environment. The best approach we can take is to keep our partner turnover as low as possible, which we've been fairly successful at doing.
Operator, Operator
Our next question comes from Shlomo Rosenbaum with Stifel, Nicolaus.
Shlomo Rosenbaum, Analyst
You're talking about M&A earlier in the call. Have you guys ever purchased a company that had a unionized labor force and is that something that would be a non-starter for you? Or is that something that you would still entertain if there are a lot of synergies?
Mike Hansen, CFO
Well, Shlomo, G&K had about 20% union workforce when we acquired them. A union environment and different culture certainly create a different operational environment. These can make capturing synergies a bit more challenging. We would evaluate a potential acquisition with a significant union component, but there is a value consideration that is part of that conversation.
Shlomo Rosenbaum, Analyst
Did I hear you right that you did not buy back any more stock after the last earnings call?
Mike Hansen, CFO
Correct.
Shlomo Rosenbaum, Analyst
Is that usually - when companies don't buy back stock and their leverage is below the level that they would consider a target level, there is usually something that is a potential out there. Is that an unfair assumption for us to make that there might be something in the near to intermediate term?
Mike Hansen, CFO
Well, Shlomo, we've always viewed that buyback as an opportunistic program. If you look back over the last ten years, we haven't been consistent from quarter to quarter, and that's by design. We evaluate various factors including business performance, investment needs, M&A opportunities on the horizon, and upcoming dividends. We've developed a consistent history of not being consistent in how we execute on that buyback program.
Shlomo Rosenbaum, Analyst
The margins of the First Aid and Safety had really good growth, but there wasn't a whole lot of margin expansion. Is there a lot of investment ongoing in terms of building out routes or anything that you're not seeing more leverage here?
Mike Hansen, CFO
We had a solid gross margin quarter, with gross margins up 110 basis points. In light of that growth, we are continuing to invest in routes and capacity. But you are correct that we have continued investments in terms of SG&A. We are pleased with the growth while managing to keep our operating margins intact, but we will continue to invest in that business.
Shlomo Rosenbaum, Analyst
Can you go over the days in each quarter year-over-year so we have that straight for the upcoming quarters?
Mike Hansen, CFO
Yes, Shlomo, it's 65 in each quarter of this fiscal year. Compared to '19, we had 66 in Q1 last year, then 65 in Q2, 64 in Q3, and 66 in Q4.
Operator, Operator
Our next question will come from Scott Schneeberger with Oppenheimer. Thanks very much.
Scott Schneeberger, Analyst
I want to hone in a little bit more on pricing, you've mentioned a nice improvement from the fourth quarter or at least still solid, which has improved from the third quarter. Could you delve a little bit into the end markets where you're seeing that pricing improvement? Is there any competitive dynamic that has changed to affect that? And when I speak of end markets, also if you could just specify across the segments.
Mike Hansen, CFO
From a market perspective, there is nothing to highlight significantly. When businesses in rental are performing well, with limited capacity, it tends to add a bit more energy to the pricing environment. We're also doing a good job of articulating why pricing can be appropriate at times. This combination of healthy market dynamics and our ability to effectively communicate provides a strong pricing environment.
Scott Schneeberger, Analyst
In response to Manav's question earlier in the Q&A, you were talking about a new item in the cabinet and how that could create a lumpy effect since the follow-on may taper a bit. How are you managing opportunities like that in terms of rolling out and servicing, and if you could share more about any impact from G&K?
Mike Hansen, CFO
We have noticed some cross-sell opportunities and benefits, as we've had through the past year. While we won't specify the item, we are consistently looking for and investing in ancillary products that add value for customers. In this case, a new rollout really made a difference. Sometimes these rollouts happen on a quarter-to-quarter basis, which makes an impact and doesn’t occur at the same time every year, but we appreciate our position to create such ancillary products within our companies including those for legacy G&K customers.
Operator, Operator
Our next question comes from Andrew Steinerman with JPMorgan Securities.
Andrew Steinerman, Analyst
Could you give a quick comment on merchandise amortization? Was it headwind or tailwind in the first quarter? Given the strong new wins, do you feel like merchandise amortization will be more of a drag going forward to margins?
Mike Hansen, CFO
There was nothing significant to call out regarding amortization in the quarter. We are in an interesting phase where we have integrated a good quantity of new Cintas product into the legacy G&K customer base, which can create some rippling effects. However, we’re overseeing that inventory management well.
Andrew Steinerman, Analyst
As you inject Cintas uniforms into the G&K customer base, do they notice that there is a quality upgrade there?
Mike Hansen, CFO
We certainly would like to think so. Our team is trained to point out the features and functionalities of our inventory and garments. As long as we're doing our job in introducing those, customers generally notice the upgrade.
Operator, Operator
Thank you. At this time, there are no further questions in the queue.
Mike Hansen, CFO
Thank you for joining us tonight. We will issue our second quarter financial results in December, and we look forward to speaking with you again at that time. Good night.
Operator, Operator
Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect. Please enjoy the rest of your day.