Executive Summary / Key Takeaways

• HireQuest, Inc. (NASDAQ:HQI) leverages a resilient franchise model that consistently delivers profitability, even as the broader staffing industry contends with prolonged macroeconomic headwinds and fluctuating demand.
• The company is actively pursuing a strategic acquisition strategy, capitalizing on market dislocations to acquire businesses at more realistic valuations, thereby expanding its geographic footprint and enhancing local operational synergies.
• Operational efficiencies, notably a significant reduction in workers' compensation expenses, are bolstering HQI's profitability and improving its overall financial health.
• While the permanent placement and executive search segments remain soft, HireQuest's temporary and day labor offerings are showing signs of stabilization, with potential tailwinds from stricter immigration enforcement.
• HQI maintains a strong liquidity position, providing substantial financial flexibility for ongoing strategic investments and consistent shareholder returns through its quarterly dividend.

The Franchise Fortress in a Volatile Market

HireQuest, Inc., founded in 2002 and headquartered in Goose Creek, South Carolina, has established itself as a prominent nationwide franchisor of staffing solutions. The company specializes in direct-dispatch, executive search, and commercial staffing, primarily serving the light industrial, blue-collar, executive, managerial, and administrative segments of the staffing industry. Operating under diverse trade names such as HireQuest Direct, Snelling, DriverQuest, HireQuest Health, and Management Recruiters International (MRI), HQI's expansive network includes 399 franchisee-owned offices and one company-owned office across 43 U.S. states, the District of Columbia, and 13 international countries as of September 30, 2025. The company serves as the employer of record for an estimated 65,000 temporary employees annually, catering to thousands of clients in sectors ranging from construction and manufacturing to healthcare and logistics.

The core of HireQuest's investment thesis lies in its flexible and resilient franchise model, which has consistently demonstrated profitability across various economic cycles, a stark contrast to many industry peers who have struggled in soft markets. This model provides franchisees with essential operational and financial support, fostering a strong local presence and customer loyalty. The staffing industry, however, has faced a challenging environment for the past 10 to 11 quarters, characterized by macroeconomic headwinds, including tariffs, immigration policy shifts, and impending interest rate adjustments. This has led employers to adopt a "wait-and-see" approach, delaying hiring decisions and impacting demand across the sector.

In this competitive landscape, HireQuest's specialized focus in blue-collar and light industrial staffing provides a distinct advantage over broader professional staffing firms like Robert Half International (RHI) or ManpowerGroup (MAN). While RHI excels in white-collar professional services with a strong global brand, HQI's localized franchise network offers greater flexibility and responsiveness in its niche markets. Similarly, against global giants like MAN and Adecco Group (ADEXY), HQI's U.S.-centric, franchise-driven approach can yield a cost advantage in localized operations, even if it lacks their extensive international scale and diversified portfolios. Kelly Services (KELYA), with its focus on science, engineering, and IT, presents a different competitive angle, but HQI's deep roots in construction and industrial staffing allow it to maintain a specialized value proposition.

The Operational Engine: Technology and Efficiency

HireQuest's operational strength is significantly underpinned by its strategic approach to technology and continuous efforts in expense management. While the company does not market a proprietary technology product, its internal "HQ WebConnect software" serves as a foundational system, providing essential software and administrative services to its franchisees. This technological infrastructure is critical for supporting the scalability and efficiency of its franchise model, a key competitive differentiator.

The company actively invests in its IT systems, as evidenced by its agreement with Insurance Technologies for cybersecurity protections and the development of future information technology systems within HQ WebConnect. An "IT project being placed in service" during the third quarter of 2025 led to an increase in depreciation and amortization expenses by $55 thousand, signaling ongoing capital allocation towards enhancing its technological backbone. Management views these IT investments as strategic for long-term value creation, even if they could be curtailed for short-term cost savings. This commitment to internal technology, while not yielding external product metrics, directly contributes to operational efficiency and the robust support provided to its franchisee network, strengthening its competitive moat.

Beyond technology, HireQuest has made substantial strides in operational efficiency, particularly in managing workers' compensation expenses. Historically a drag on earnings in 2023 and 2024, the company's implemented changes have resulted in a significant improvement. For the three months ended September 30, 2025, HQI reported a workers' compensation benefit of approximately $99 thousand, a notable turnaround from a net expense of $499 thousand in the prior-year period. Over the nine months ended September 30, 2025, workers' compensation expense decreased by $1.6 million compared to the same period in 2024. Management anticipates further reductions in 2025, potentially moving towards a neutral impact, which would further enhance profitability.

Financial Resilience Amidst Headwinds

Despite the challenging market, HireQuest's franchise model has enabled it to maintain solid financial performance and robust liquidity. For the third quarter ended September 30, 2025, the company reported net income of $2.3 million, or $0.16 per diluted share, and adjusted net income of $3.4 million, or $0.24 per diluted share. Adjusted EBITDA stood at $4.7 million, with an impressive margin of 55%, up from 52% in the prior year, underscoring the operational leverage of its model.

Total revenue for the third quarter was $8.5 million, a 9.8% decrease from $9.4 million in the same period last year. This decline was mirrored in franchise royalties, which fell 9.8% to $8.1 million. System-wide sales, a key performance indicator, decreased by 10.1% to $133.6 million for the quarter, primarily driven by declines in the MRI ($9.9 million), HireQuest Direct ($3.6 million), and Snelling/HireQuest ($1.4 million) segments. For the nine months ended September 30, 2025, total revenue was $23.6 million, an 11% decrease from $26.5 million in the prior year, with system-wide sales down 11.9% to $377.4 million.

Operating expenses for the third quarter decreased by $6.1 million, largely due to a $5.8 million impairment in goodwill and intangible assets related to the MRI acquisition in the prior year, and the aforementioned $598 thousand decrease in workers' compensation expense. These were partially offset by a $243 thousand increase in legal and professional expenses and a $175 thousand increase in the write-down of notes receivable. Interest and other financing expense significantly decreased to $63 thousand in Q3 2025 from $268 thousand in Q3 2024, consistent with a reduction in the outstanding line of credit balance.

HQI's balance sheet reflects strong liquidity. As of September 30, 2025, current assets exceeded current liabilities by $31.46 million, an increase from $25.1 million at December 31, 2024. The company had $1.1 million in cash and $46.9 million in net accounts receivable. Net debt stood at approximately $1.1 million, a substantial reduction from $11 million at September 30, 2024.

With approximately $42.5 million available on its Senior Credit Facility, HQI possesses ample financial flexibility for working capital needs, capital expenditures, and strategic acquisitions.

Strategic Growth: Acquisitions and Market Positioning

HireQuest's growth strategy is dual-pronged, encompassing both organic expansion and strategic acquisitions. Organic growth focuses on expanding existing client relationships, pursuing national and global account opportunities for franchisees, facilitating franchisee access to capital for new market entry, and offering new franchises to qualified applicants.

The company's M&A strategy is a critical component, targeting "strategic, accretive, tuck-in acquisitions" financed through a combination of cash, debt (including seller financing), equity, and earn-outs. This approach has been active, with over $77 million in acquisitions since its merger with Command Center in 2019. Recent examples include the acquisition of Ready Temporary Staffing, LLC (RTS) in December 2024 for $1.4 million, which expanded its Colorado presence, and the acquisition of EPIC Labor's customer relationships in September 2024, which were immediately sold to new franchisees. Management notes that the current market, characterized by prolonged softness, presents an "especially interesting time for deals" as smaller firms or retiring owners become more realistic with their pricing expectations. HQI is actively engaged with several potential targets, confident in its proven acquisition strategy.

In the competitive landscape, HQI's franchise model and specialized market focus provide distinct advantages. Its extensive franchisee network fosters strong local presence and customer loyalty, translating into stable revenue and efficient talent deployment. This model allows HQI to potentially achieve superior margins by reducing overhead costs compared to larger, more centralized competitors. The company's specialization in niche sectors like construction and commercial driving enables deeper expertise and faster response times, differentiating it from broader professional staffing firms.

However, HQI faces vulnerabilities due to its relatively smaller scale compared to global players and its exposure to cyclical industries, which can lead to more volatile revenue and margins during economic downturns. While HQI's internal technology supports its operations, it may lag behind some rivals in visible technological innovation, potentially affecting market adaptation and operational costs. The company also faces challenges in retaining franchisees, particularly within the MRI Network, where the "network of somewhat related recruiting firms" model differs from its traditional, more integrated franchise structure. This has led to some franchisee non-renewals, negatively impacting MRI's year-over-year comparisons. To address this, HQI has reorganized and refined MRI operations, combining departments to drive efficiencies.

Outlook and Key Catalysts

HireQuest's management maintains a cautiously optimistic outlook, grounded in the proven resilience of its franchise model. While the overall staffing market is expected to remain challenging, particularly for permanent placement and executive search, the company sees signs of stabilization in its temporary staffing and day labor segments. Management believes the day labor business is "approaching the bottom," with some early fourth-quarter 2025 weeks for Snelling and HireQuest Direct already exceeding prior-year comparisons.

A significant potential tailwind for HQI is the enhanced enforcement of immigration regulations. As an E-Verify employer, HireQuest anticipates increased demand for its services as employers are required to hire documented workers, creating a more level playing field. The long-term impact of "reshored facilities" eventually staffing up factories is also expected to boost demand, though this will take time to materialize.

The company's strategic M&A pipeline remains strong, with management expecting more accretive acquisition opportunities in the coming 3 to 6 months as sellers adjust their valuation expectations to the prolonged soft market. Operationally, the positive trend in workers' compensation expense is expected to continue, with management projecting further reductions in 2025, potentially reaching a break-even point. HQI also expects to complete the sale of its Philadelphia Dubin Group location, currently classified as discontinued operations, within the next 12 months. The recently signed "One Big Beautiful Bill Act" on July 4, 2025, is not expected to materially impact the company's financial position or results. The company intends to continue its regular quarterly dividend, subject to Board discretion.

Navigating the Investment Landscape: Risks and Considerations

Investing in HireQuest is not without its considerations. The company faces ongoing macroeconomic risks, including potential recessions, tariffs, and geopolitical events that can disrupt supply chains and depress demand in its core industrial and construction sectors. The inherent cyclicality of the staffing industry means that HQI's revenue and profitability can be sensitive to economic fluctuations.

Operational risks include the potential for workers' compensation expenses to fluctuate, although management has made significant progress in this area. The integration of acquired businesses always carries the risk of failing to achieve expected synergies, leading to higher operating costs or customer loss. Furthermore, the company has identified a material weakness in its internal control over financial reporting, specifically concerning insufficient accounting resources and a lack of segregation of duties in IT systems, which it is actively working to remediate. Disruptions to its technology network, including cyber-attacks, also pose a risk. Finally, sustained inflationary pressures could lead to increased wage demands, potentially impacting profitability if HQI cannot effectively pass these costs on or if it leads to employee attrition.

Conclusion

HireQuest, Inc. stands as a compelling investment opportunity, distinguished by its robust and consistently profitable franchise model in a challenging staffing market. The company's strategic focus on operational efficiency, particularly the successful reduction in workers' compensation expenses, combined with a disciplined M&A strategy, positions it to capitalize on market dislocations and expand its footprint. While facing headwinds in permanent placement, the stabilization of its temporary and day labor segments, coupled with potential tailwinds from stricter immigration enforcement, offers a pathway for future growth. HQI's strong liquidity and commitment to shareholder returns underscore its financial health. Investors seeking a resilient business model with a proven track record of profitability and a clear strategy for growth through both organic initiatives and accretive acquisitions should consider HireQuest's strategic edge in the evolving staffing landscape.