Allow me to mangle a perfectly good old saw: If wishes were fishes ... Resources Global (Nasdaq: RECN) would stop the ceaseless slide in its profit margins.
For months now, I've railed over the primary task facing currently "sidelined" Motley Fool Stock Advisor recommendation Resources Global (a.k.a.. "Resources Connection," a.k.a. "RG"): Stop letting the profits slip away. Forget improving profit margins for the moment -- for now, we'll be happy just to see management find a way to halt the ever-diminishing profitability of its ever-growing revenue stream.
Sadly, that stream seems devoid of fish.
Enough with the metaphors. Get to the numbers.
As you wish. RG once again turned in perfectly respectable revenue growth in yesterday's earnings report -- 8.2% firmwide, to $202.8 million. That total included anemic 3.5% growth stateside, and gangbusters 22.9% improvement from international operations. The latter number, by the way, shows the flipside of the incredible shrinking dollar phenomenon, which has been dogging foreign consulting firms such as Satyam (NYSE: SAY), Infosys (Nasdaq: INFY), and Wipro (NYSE: WIT) lo these last few quarters. For RG, revenue earned abroad translates into more and more dollars here at home, the more those dollars devalue.
Sure, revenue growth fell short of analyst expectations, but not by much. And on the plus side, the 27% decline in profits, to $0.19 per share, was just what Wall Street had in mind.
But that's just the thing, you see. When revenue goes up, profits are supposed to follow -- not scamper in the opposite direction. Alas, RG's completely unable to contain costs. Gross margins in Q3 dropped another 90 basis points in comparison to fiscal Q3 2007. Operating costs headed the other way, with selling, general, and administrative spending rising, lopping a further 250 basis points off of operating margins.
As a result, the Q3 operating profit margin tumbled 350 basis points year over year, ending with a thud at 7.7%. Year to date, operating margin is a still-respectable 9.3%, but if yesterday's news is any indication of where RG is headed, this firm will almost certainly end the year earning less per revenue dollar than either of rivals Robert Half (NYSE: RHI) or Accenture (NYSE: ACN).
As for my hopes to invest in what I thought was a superior business, back when Tom Gardner recommended it to Stock Advisor members two years ago -- don't bother asking. Until these guys get their act together, I'm gone fishin'.
What did we expect out of Resources Global last quarter, and what did we get? Find out in:
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