A few years back a Kelly SVP gave a lecture to a group of us at a staffing industry conference. “This industry needs to seriously examine itself,” I remember him saying. “Without a radical improvement in customer satisfaction rates, some of you will find yourselves without a profitable business model.”

It appears he was right. Kelly reported a massive loss again for the traditionally strong third quarter. The company also posted $60+ million in undeclared expense as “Goodwill”.

(Someone challenged me on my reporting of Kelly’s “Goodwill” accounting, citing standard GAAP accounting principles. Look, if I bought a company in 2007 for $10 million and now the company is worthless, then I’ve lost $10 million. It doesn’t matter what GAAP says. Same goes for mortgage companies – if they issued a mortgage for a $1 million South Beach condo and the borrower defaults and the condo now sits on the market at $250k, then they’ve lost $750k.)

I’ve read through Kelly’s earnings call transcripts, and nowhere can I find mention of significant impairment.image Given the larger number of branch closings that they did discuss, goodwill impairment should have been the story of the call.

Upright and magnanimous the CEO should have said flat out, “Our egos got the best of us and we overpaid at the top of the market to the tune of $60 million for acquisitions that are now almost worthless.  We apologize to our shareholders.”

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Let’s look at the revenue trend:

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And the low cash reserves:

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Finally, the profit (loss) trend:

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What I can’t figure out is why a company with weakening credit, mounting losses and undeclared expenses can maintain the market cap it does:

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Here’s what Kelly needs to do to survive.  First, get rid of all non-revenue generating headcount. That means outsourcing all back office and IT.  Ok, there’s a little self-interest in me saying this first – it’s what TempWorks does, after all. Second, get all the performers on a clearly laid-out compensation plan. Think Glengarry – first place the new car, third place you’re fired.

In any case it would seem the Kelly executive was clairvoyant.

Tags: Industry