"[T]he downward trends in new home construction experienced during the third and fourth quarters of 2006 have expanded to other industries and continued into the first quarter of 2007." So said Steve Cooper, CEO of blue-collar temp agency Labor Ready
By every conceivable metric, Labor Ready stunned the critics last week. Sales came in at $290 million for the quarter, a much smaller decline than Wall Street's analysts had expected, and smaller also than Labor Ready itself seemed to be preparing for. Likewise with earnings, which although down 10% at $0.21 per share, fell much less steeply than predicted thanks to lower workers' comp expenses (which boosted gross margins by 70 basis points). Although the newspapers remain filled with horror stories from Toll Brothers
Share buybacks also are helping Labor Ready stem the slide in per-share profits. As predicted in both our pre-earnings Foolish Forecast, and in Philip Durell's most recent update on the company for Motley Fool Inside Value, Labor Ready spent enthusiastically to repurchase its shares this quarter, reducing shares outstanding by a good 9%, and concentrating earnings among the shares remaining as a result. (Absent those buybacks, profits per share would have come in at $0.19 diluted -- but that would have still beaten analyst estimates.)
With all this good news about one of our recommendations, I almost hesitate to raise concerns over the future -- nobody likes a party pooper. Still, as investors who watched their holdings rocket in value last week know, success is that much sweeter when you were first prepared for the worst.
For Labor Ready, I see a potential "worst" in rising labor costs. According to Cooper, higher wages ate away 0.5% worth of gross margin last quarter, due to "the large number of states with minimum wage increases." So it's worth keeping an eye on the progress of Congress' initiative to raise the federal minimum wage. Yesterday, House and Senate lawmakers agreed to a package of tax breaks that the president has insisted on as a precondition for signing the wage increase into law. If passed, the increase would gradually raise the minimum wage by 40% over the next two years -- an increase big enough to almost certainly grow Labor Ready's labor costs.
How good is Labor Ready? Why, it just might be The Best Small Cap for 2007: Labor Ready.