TrueBlue: Ready To Unravel As Amazon Turns Off

| About: TrueBlue, Inc. (TBI)

Summary

I haven’t been a fan of the company for a while, but changing fundamentals seem to be reconfirming the doubts related to the business.

Revenue from Amazon is falling off the cliff, but rest of the business does not instill much confidence either.

Declining top line, poor macroeconomic outlook, soft margins and debt may limit the company’s ability to do major acquisitions.

I have been negative on TrueBlue (TBI) for a while now, as reflected by my previous notes here and here, and the stock has not done much good for shareholders during that time frame either. Late last week, the company once again disappointed by delivering weak results and poor guidance that was followed by the stock declining by more than 10%, begging the question whether the correction changes anything. Looking closely, the fundamental health of the business is deteriorating and management might be occupied with re-aligning the business for the next few quarters, if not years, something the existing investor base might not take it patiently.

Part of the investor frustration or elevated disappointed might be due to the high hopes attached to the name over the last few years. The promise to monetize the double-digit top-line growth offered by the shift toward RPO (recruitment process outsourcing) in the staffing industry and riding the Amazon (NASDAQ:AMZN) relationship, especially for Canadian fulfillment centers and U.S. delivery stations, was good enough a reason to excite anyone. Even now, some may like to highlight the strength seen in the Managed Services segment or the staff management business, excluding Amazon, even though both opportunities seem too small to make any meaningful impact at the consolidated revenue level. No doubt, the company is taking some steps to de-risk and grow the business, be it the recent efforts to streamline and simplify branding or acquisitions that seem to be performing ahead of expectations, including the Aon Hewitt's (NYSE:AON) RPO service line.

But the problem is that the issues run deeper and may take longer to correct. Even if one ignores the macroeconomic issues, be it the lack of growth and rising expenses, the problems seem largely related to the business model itself rather than just a typical business cycle related issues. On an organic basis, the top line is shrinking at a mid-high single digit rate, with most verticals, except maybe residential construction, showing a decline. To shrug off current issues as temporary and particular customer transition-related issues, which is Amazon in this case, may be a mistake.

Image: TrueBlue earnings presentation

Revenues from Amazon, company's biggest customer, have fallen off the cliff and there is hardly any new business in sight that can help offset the decline, near or medium term. Besides the loss of contract, timing of the Amazon decision, given the holidays, highlights the deeper issues with the quality, cost and relevance of the solution itself. Earlier, market adjusted to the company's shrinking role at Amazon's fulfillment centers. But losing out on the delivery stations opportunity, which was long touted as a major growth opportunity long term, may lead to a re-rating of the business.

The problems do not seem to be restricted to the Amazon relationship. The organic revenue trends continued to worsen through the previous quarter and there is little to suggest that the momentum may turn anytime soon. So far, the problem may be largely at the national level accounts, but why will it not flow down to the local accounts is not clear. The margins may remain under pressure from rising expense, shrinking revenue and integration of recent acquisitions, while debt, weak stock price and poor EBITDA trends may arrest the company's ability to acquire assets, especially when measured against competitors like Robert Half (NYSE:RHI), Korn Ferry (NYSE:KFY) and On Assignment (ASGN).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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