LABOR READY: WRINGING RICHES FROM MANUAL LABOR TEMPS

Supplying businesses with day workers to perform manual labor at near minimum wage doesn't sound like a hot growth business. But Labor Ready (LBOR), a temporary staffing firm based in Tacoma, Wash., has a business model that is so successful in this niche that it engenders comparisons with Starbucks (SBUX). The company expects to open 160 new offices in the first half of 1998 for a total of 476 nationwide. Revenues have grown from $163 million in 1996 to $335 million in 1997, and profits from $724,000 in 1996 to $6.96 million last year. The company hopes to have 875 dispatch offices and $1 billion in revenues by the year 2000. Analysts project long-term earnings growth at 50% a year.

Not surprisingly, the stock has shot up. From $6 a share a year ago, Labor Ready's shares closed on May 19 at 36 7/16, after adding on another 1 1/16. The company will present its story at an investment conference on May 20 and may get a boost as investors learn more about it. Only a handful of analysts, mostly from regional firms, cover the company at the moment. And they are virtually unanimous in their strong recommendation of the stock.

Labor Ready is the largest, if not the only, national staffing company that focuses on the light industrial niche. Unlike national staffing firms Manpower (MAN) and Kelly Services (KELYA), which serve a more corporate clientele, Labor Ready does the tough, dirty work. It operates "dispatch offices" from store fronts in low-income neighborhoods that aren't far from the jobs that need filling. Workers are usually screened only to make sure they are eligible to work in this country. Then they just show up in the morning and are sent out as jobs come in -- sort of a nonunion hiring hall for parttimers.

Labor Ready charges companies an average of $10.50 an hour and pays workers about $6 an hour to dig a ditch, load truck, or clear away construction debris. At the end of the day, laborers return to the office, where a check is waiting. If they choose, they can cash the check immediately at one of the cash dispensing machines Labor Ready is currently adding to all its offices.

For unskilled workers who may not be able to make it through a typical hiring process, Labor Ready offers an accessible job and a quick source of cash. Workers also get a chance at full-time employment. Unlike other temp agencies, Labor Ready doesn't charge a fee if a customer wants to hire a worker permanently. And about 20% of the laborers for whom it finds part-time work end up getting hired full time, says Dennis Diamond, executive vice president of operations at Labor Ready. For a certain portion of the labor market, "we are the answer," he says.

Given low levels of unemployment and booming construction trades, it is easy to see why there's demand for the day laborers that Labor Ready provides. Companies get a dependable source of cheap labor and don't have to deal with taxes, insurance, or benefits.

"It is a very profitable model that is easy for them to reproduce," says Deborah Wardwell, an analyst with Cruttendon Roth. "Growth is a function of how many stores they open." And, analysts say, the number could be nearly unlimited. The market for placement services for this segment of the temporary workforce has grown to about $5 billion a year, estimates John Schneller, of Stephens Inc., which is hosting the May 20 investment conference in Chicago. And Labor Ready's basic business model seems to work well in cities both small and large, and improves because of brand recognition when there are several locations in the same city, analysts say. After saturating the U.S. the company could expand into Europe, where temporary staffing is just starting to catch on, before trying the rest of the world.

Labor Ready's business model hasn't always worked so well. The company disappointed investors early in 1997, when rapid expansion didn't prove as profitable as expected. In August, the company brought in a new financial team, which raised earnings and improved the company's credibility with investors. The team dramatically upgraded business practices, bringing in new information systems, new approaches to managing expenses and vendors, and reducing the costs of workers' compensation insurance. Where it used to take new stores four to six months to become profitable, it now takes only two to four months. Existing stores also became more profitable.

Labor Ready's stock has clearly had a good run and the current P/E of 87 looks staggering. But analysts say the stock is cheap relative to its 50% long-term earnings growth rate and its forward P/E of around 35. Of course, with any high P/E stock, there are considerable risks. For instance, revenue growth could stall if the economy slows.

Still, economists and analysts tend to disagree over whether corporate use of temporary staffing will decline in a recession. Some argue that if the economy slows companies will use more temporary workers as a way to avoid hiring new people. "We've been through recessionary periods before," says Diamond. "It really hasn't affected us."

Labor Ready is still a small company that has a huge market virtually all to itself. And it is just starting to catch Wall Street's eye. So despite its tremendous run so far, it could just now be hitting its stride.

By Amey Stone, Associate Editor
Business Week Online