By Marla Backer

OBB:LTNC

Last week, Labor Smart (LTNC) announced results for 2Q 2014, with revenue of $6.43 million up 59.5% year-over-year. This growth reflects the company’s expanding footprint, combined with rising revenue at existing branches. Branches that had been in operation for over one year registered same-store revenue growth of 35.8%, according to management. The company was able to achieve operating leverage against the above-noted revenue increase.

Gross Margin Expansion

Cost of services came in at 78.8% of revenue, down from 84.9% in the second quarter of 2013. As a result, Labor Smart’s 2Q 2014 gross margin came in at 21.2%, a more than 600 basis point expansion year-over-year. The company’s goal is to drive further gross margin improvements. Its recent transition to self-insuring in 14 states, a better product mix and continued focus on cost containment efforts are likely to help with this goal.

The company increased its guidance for 2014 gross margins to 23.5% for the full year and 25% in 4Q 2014. This compares to management’s original gross margin target of 22% by 4Q 2014. At the same time, management shaved its 2014 revenue guidance, reflecting the recent elimination of some lower margin, higher risk business.

Second quarter 2014 operating expense rose 27.7% year-over-year, but fell to 23.3% as a percentage of revenue from 29.1% in last year’s second quarter. Higher revenue combined with lower relative costs enabled Labor Smart to narrow its operating loss to ($136,000) from ($566,739) in last year’s second quarter. Moreover, the company reported positive adjusted EBITDA of $401,455, excluding non-recurring acquisition and expansion costs of $341,730.

Expanding Client Base

In the second quarter of fiscal 2014, Labor Smart added 289 new clients. Management’s strategy is to continue to expand its client base. The company expects to add customers that are active during current slower periods in order to smooth out the seasonality of its business. For example, peak demand for temporary labor from the hospitality industry generally does not coincide with peak demand from the construction industry. Management also expects to expand its opportunities with existing clients across multiple branches and markets.

In March 2014, Labor Smart appointed a Director of Business Development. We believe this is consistent with management’s strategy to forge relationships with multi-regional companies in order to drive revenue from its existing customer base across multiple stores, drive recurring revenue and grow its overall customer base.

Strengthening the Balance Sheet

Management’s strategy is to reduce its reliance on short-term convertible financing. We would view it positively if Labor Smart were able to obtain a revolving credit line at reasonable terms. Earlier this year, the company also negotiated better terms with Transfac Capital for funding against 85% of receivables, up from the 70% earlier. Management believes this improvement reflects the growth of its business. Moreover, funding against a larger portion of its receivables will also help the company reduce its reliance on short-term convertible financing.

Opportunistic M&A

The company also intends to accelerate its growth through acquisitions going forward. Management believes it can integrate $20 million to $40 million in acquisitions in 2015. The staffing industry is highly fragmented, implying substantial M&A opportunities, we believe. Complementing its opportunistic M&A strategy, the company anticipates launching up to 12 new sites organically in 2015. Management’s strategy is primarily to add new locations in markets where existing regional and national clients have operations and can generate new assignments for on-demand labor.

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