Kelly Services Posts 2Q Net Income Down by One-Third, Expects Rough ’08

The president of leading contingent staffing firm Kelly Services Inc. says he foresees difficult times for the remainder of 2008.

“The second quarter was a rough one,” said Kelly Services president and CEO Carl Camden during an earnings conference call last week.

“Overall demand for labor in the U.S., already weak, has worsened since we last reported to you, and demand for temporary staff is declining at an even faster rate.”

Kelly’s U.S. commercial business has seen declining revenue for the past seven quarters, Camden said.

The length of the declines is outpacing the six quarters of declines Kelly saw during the recession of 2001, he said, although current declines have not been as large on a percentage basis.

“There is no doubt the economy has worsened in the last three months, and that difficulties experienced in the U.S. and [the U.K.] are now being experienced elsewhere,” Camden said.

“It wouldn’t be surprising if conditions continued to be difficult throughout 2008 and perhaps longer.”

The Troy, Michigan-based staffing firm reported net income of $10.5 million, or 30 cents a share, on revenue of $1.45 billion for the quarter ended June 29.

That compares with net income of $15.3 million, or 42 cents a share, on revenue of $1.42 billion for the same quarter last year.

For the six-month period, Kelly reported net income of $18.7 million, or 54 cents a share, on revenue of $2.84 billion. That compares with net income of $27.2 million, or 74 cents a share, on revenue of $2.76 billion during the first half of 2007.

Given the continued economic uncertainty, Camden said Kelly would not provide quarterly earnings guidance.

In the conference call, the company appeared to attribute the decline in margin in part to cost-cutting not keeping pace with revenue declines in the U.S. and declines in gross profit margin in some other areas.

Declines were led by a 21 percent drop in operating earnings year over year for Kelly’s Americas commercials business. The segment represents about 45 percent of Kelly’s total business, Camden said.

The firm’s professional and technical business in the U.S. was flat year over year and down 3 percent from the first quarter, when adjusted for the Easter week, which fell in the second quarter last year and in the first quarter of this year, he said.

General economic conditions worsened during the quarter in Europe, especially in England and to a lesser extent in Western Europe, Camden said, leading to a 7 percent decline in Kelly’s revenue there during the quarter.

But some areas are still seeing growth, including France, where Kelly’s revenue increased 4 percent during the quarter, and Eastern Europe, where Kelly’s revenue spiked 33 percent, led by strong performance in Russia, Camden said.

Revenue for Kelly’s outsourcing and consulting group, which represents about 4 percent of total revenue, increased nearly 60 percent for the quarter, year over year, to $61 million.

Kelly Services plans to retain its focus on the group’s higher-margin, fee-based business that capitalizes on corporate outsourcing of human resource functions while expanding its professional and technical business, improving its operating margins and diversifying geographically, Camden said.

In mid-July, Kelly said it had entered an agreement to acquire the shares of the Portuguese subsidiaries of Amsterdam, Netherlands-based Randstad Holding N.V. for an undisclosed amount.

Kelly said it expects the deal, which is subject to approval from the European Commission, to close during the third quarter of this year.

The market for staffing firms is not favorable right now and faces “a pretty significant headwind,” given that it is cyclical, said Tobey Sommer, a director in the equities research department of SunTrust Robinson Humphrey, which said in a disclaimer that it also provides investment banking services and other services for Kelly.

The agency has a neutral rating on Kelly’s stock, Sommer said.

Kelly’s fee-based outsourcing and consulting business “is one of a few bright spots right now” for both Kelly and the staffing industry as a whole, he said.

“There appears to be an opportunity there, [and] Kelly may have an edge in competing for that stuff because their strategy has been for years to focus on the largest customers around the globe.”

Filed by Sherri Begin of Crain’s Detroit Business, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.