Description

Description

I’d like to put STAF on the radar because I think after years of poor financial management, they are at or close to the bottom.  If, and I caveat it’s a major if, management has learned from past mistakes and can get out from under the foot of their largest backer, the stock can be a huge winner from here in a normal business cycle.  

Staffing 360 Solutions is an international staffing agency focused in the eastern US and the UK.  Roughly 2/3 of the revenue comes from the US and 1/3 from the UK.  The US operates under 2 Commercial Staffing agencies (Monroe and Key Resources) and 1 professional agency (Lighthouse) while the UK operates under 3 professional businesses (JM Longbridge, CBS Butler, and Clement May)  These temporary staffing agencies have been acquired over the past decade in a buy-and-build strategy.  Up until now, the strategy has had limited success because of the way the acquisitions were financed. 

The company has a history of skating too close to the edge in terms of cash management and financial security, and ended up getting under the foot of related party Jackson.  Jackson Investment Group is the investment arm of Jackson Healthcare, one of the largest healthcare staffing agencies in the country.  The initial idea behind the investment seemed to be to turn Staffing 360 into the public arm of Jackson as they branched out from healthcare staffing and at one point reverse merge into Jackson Healthcare to take them public.  

Turns out, it became much better for Jackson to become the main financer of STAF as they pillaged all the FCF from STAF and continually boxed STAF into a corner at the expense of shareholders.  It turned out to be an extremely lucrative proposition for Jackson as they have been able to slowly convert their equity investment into debt and preferred shares.  One can see this transition by the various iterations of preferred shares issued over the past few years.  There have been Series A, Series E, Series E-1, Series G, and Series G-1 issued over the years.

After finally realizing the folly of their ways, the company pivoted and has issued stock sale after stock sale to repay the debt and buyback the preferreds. Shares outstanding has ballooned from under 2mm to 17mm today with warrants for another 10mm existing (all warrants strike well above today’s price).  These stock sales have continued into the most recent quarter as can be seen from the most recent slide deck.

The good news is that the company is pretty much finished converting the capital structure and now might actually prove a reasonable entry point for future shareholders, unlike any shareholders before.

When you actually look at the financials, the company is seeing green shoots from the end of Covid and as tight as the labor market is, is benefitting from working conditions returning to normal.  The third quarter was profitable from an operating income perspective while the $20mm YTD in PPP forgiveness has distorted the headline numbers.  

From the most recent earnings call, “While we're not issuing specific guidance, we do continue to expect to beat both the revenue and gross profit numbers in the second half of the current year, with improvement in gross profit being more significant than the improvement in revenue.”

Management points to new business wins in the UK and continued strength in the US as drivers for 2022.  Some of the difficult points have been the ability to retain temporary employees.  The permanent placement side of the business has been doing quite well as contract companies are taking on the temporary hires full time, but that has been happening at such a pace that it is difficult to backfill the temporary employees. “As many of our fellow public company staffing companies have found, the return of available workers since the seeming end of the stimulus check program has been slower than anticipated. As a consequence of this, we have concentrated on driving gross profit and EBITDA growth sometimes at the expense of revenue. Gross profit and EBITDA are the staffing industry standard for true measures of performance.”  I don’t think management is terribly inept but I don’t think they have been good stewards of capital to this point.  I view that primarily as being too optimistic about the growth potential of the business and not cautious enough about potential pitfalls surrounding their strategy.  However, I do believe they can run the business well and have learned how they needs to run a public business.  The window to transition the company had already closed by then which is how they got into the corner they were in as good options dwindled to zero. But they have taken the necessary steps (however painful they were to existing stockholders at the time)

The company is doing about $200mm in revenue for 2021 and about $35mm in gross profit.  The eventual model is to return to an acquisition phase for the company to achieve the necessary scale.  In order to do that they will need to finally finish dealing with Jackson.  Whether this is via a refi externally or more stock sales, any purchase should be viewed with caution. 

I think once they are able to put Jackson behind them, they will be able to correctly execute the strategy they need to in order to grow the business profitably.  There is plenty of runway to $2 over the next few years should that occur before the warrants start diluting.  

RISKS

Maybe management hasn’t actually learned anything and is still hopelessly optimistic giving away upside whenever and wherever they can in hopes of empire building an unprofitable empire

Rising rates cause a recession, which while hurting overall employment, would alleviate some of the worker shortage and retention issues they are experiencing.  So this one isn’t a full negative

Continued involvement of Jackson.  They need to get rid of Jackson.  Management is overly grateful to Jackson for keeping the company afloat for all these years not realizing they have also been enormous chains holding the company down.  Jackson is smarter than them and financially savvy.  View any and every transaction with Jackson as existing to enrich Jackson.  Publicly management is grateful, privately I would imagine differently should you choose to contact.

More stock sales.  They have not fully eliminated the debts involved.  If they can refinance externally great, otherwise I would not participate in any private or public offering.  They need to finish the transition and have a solid quarter before turning this into a sizable position.

Catalyst

The business itself is actually pretty simple and predictable, it’s the capital structure that has absolutely killed them over the past few years.  Once this reaches its endgame and it looks like it will soon, it should be on your radar