Resources Global Misses Again

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In the last few hours preceding Resources Global's (Nasdaq: RECN) Q2 earnings report, I made a single Christmas wish of new Chief Financial Officer Nate Franke: Stop the consulting firm's continuing slide in margins, so that the firm's continued strength in sales can translate into growing profits. The company failed on both counts -- but to be fair, five days probably wasn't quite enough time to get the job done.

You see, Franke only assumed the mantle of CFO on Nov. 26, and Resources Global (RG) closed the books on its second quarter 2008 on Nov. 30. But as Thursday's news showed, there's plenty of work to be done. Spin though it might, RG's report of "quarterly revenue of $206.6 million, up 13% over prior year" and "gross margin up 60 basis points sequentially to 38.5%" (emphasis added, to highlight the shifting frame of reference) shows deterioration in the quality of the business. If I might nail things down to a single frame of reference for the duration of this column, what we saw was:

• U.S. sales rising 9%, and international sales 16% on a constant currency basis
• Add the effects of a depreciating U.S. dollar, and international sales rose 27%, resulting in total sales growth of 13% year over year
• Gross margins dropped 120 basis points to reach 38.5%
• Operating margins dropped 290 basis points to 11.5% on the back of much higher selling, general, and administrative expenses

Trend-wise, the firm's 13% sales growth is slower than the 19% Resources Global averaged over the preceding two quarters, and the trailing-12-month tallies for each of gross, operating, and net margins continued their more-than-year-long slide. Relative to the competition (although few if any firms track RG's business model exactly), RG continues to boast better margins than, say, Robert Half (NYSE: RHI) or BearingPoint (NYSE: BE). However, it has dipped significantly below Accenture (NYSE: ACN) in terms of operating margin.

Cash profits
RG kept mum on the subject of free cash flow, neither mentioning it in the press release, nor including a cash flow statement; and it hasn't filed its 10-Q yet, which will contain that document. I can only surmise that free cash flow wasn't great, however, because the $120.7 million RG reported in cash and equivalents was down from the $149.2 million it had on hand in November of last year.

All in all, a disappointing quarter -- and one we hope to praise Franke for improving upon in three months' time.

Need more Resources research? Peruse:

• Resources Connection's Vacation
• Resources Connection Falls Short: Fool by Numbers
• Our interview with CEO Donald Murray.

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