LTNC: Revenue Trends Strong At Labor Smart

Zacks Small Cap Research
August 7, 2013

By Marla Backer

We believe for the balance of 2013, Labor Smart (OTC BB:LTNC) will focus on consolidating its position in the 14 markets in which it operates, leveraging its growing customer base and managing its balance sheet. Recent revenue trends remain strong, in our view. Labor Smart announced last week that July 2013 revenue of $1.59 million exceeded July 2012 by 172%. Through July, 2013 revenue was up 133% to $8.1 million compared to $3.5 million generated in the same period of 2012. With June, May and April 2013 revenue at $1.46 million, $1.58 million and $1.00 million respectively, 2Q13 revenue came in at an estimated $4.04 million compared to $1.71 million in 2Q12. We recently raised our forecast to reflect the solid revenue run rate (see our July 18, 2013 note Raising Estimates). If revenue trends remain as strong we believe there could be further upside.

The company’s customer base exceeds 1,000 clients.
We believe this is important because revenue growth and margin expansion are highly correlated to customer base expansion, in our opinion. In 2011, Labor Smart had 47 customers. In November 2012, the company’s customer base exceeded 300. Now, it is above 1,000, as noted. A large and diversified customer base gives the company greater flexibility in managing gross margins, in our view. When a new location opens, the branch manager first looks to the construction and janitorial industries for potential customers. These industries have relatively short sales cycles and their staffing needs fluctuate considerably. As branches mature, they can fill more competitive assignments, often leveraging the customer base that the overall organization has established to improve the revenue mix and to generate sales in new verticals with existing customers.

The company also announced this week that it had obtained a credit facility for up to $2 million secured by its accounts receivables. This gives Labor Smart additional financial flexibility as it implements its growth initiatives, in our opinion. We anticipate that branch expansion will resume in 2014, when Labor Smart intends to open another 25 to 30 locations. Since launching operations with two branch offices two years ago, the company has grown to 14 branch offices operating in nine states. Labor Smart ultimately plans to have a national footprint, which would provide a competitive advantage, we believe, over more regionally focused competitors and enable Labor Smart to leverage its marketing efforts across geographic markets. Most of the early growth has been through new branch openings, although in 2Q13 the company acquired a three branch staffing company based in Florida.

We continue to believe that Labor Smart has significant growth opportunities. In our view, risks include that the company is highly dependent on founder and CEO Ryan Schadel, is under-capitalized, could expand too rapidly, competition could increase, customers could shift towards hiringmployees instead of using temporary workers and economic factors could constrain industry growth.

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