NEW YORK (Fortune) -- It's no surprise that U.S. retailers are slowly running out of room to expand - after all, there are only so many places you can plop down a 100,000 square-foot superstore.

With that in mind, smart companies are looking at every aspect of their operations in order to gain an edge over competitors. Since labor costs can represent 50 percent to 60 percent of operating expenses for a typical retailer, many companies have focused laser-like on getting the most out of their labor dollar.

One company that helps retailers do this is Toronto-based Workbrain, whose software simplifies the everyday drudgery of employee schedules, forecasting how many extra workers will be needed, say, during the holiday rush, and tracking worker absences. (For example, the Monday after the Super Bowl always has an increased number of no-shows.)

These tasks were previously done manually at the store level and at great expense - with many errors to boot. Stores are commonly overstaffed during slack periods, driving labor costs up, or understaffed during peak periods, resulting in lost sales.

Today, chief information officers want to centralize and optimize such tasks, leaving employees free to serve customers. This is Workbrain's bread and butter, and its blue-chip client list includes mega-retailers like Target (Charts), Best Buy (Charts), JC Penney (Charts), Gap (Charts), Lowe's (Charts) and Radio Shack.

Overall, Workbrain has been licensed to manage the virtual time cards of over five million employees, about 90 percent of them in the U.S. Target alone accounts for 350,000.

Workbrain's chief strategy officer David Stein says that clients see a 1 percent to 2 percent reduction in labor costs by using his software. Those savings go right to the bottom line: Sanford Bernstein & Co. analyst Emme Kozloff estimates that using a workforce management provider like Workbrain can increase a retailer's net profit margins and drive long-term earnings per share higher by as much as 1 percent - 2 percent. In Kozloff's view, retailers like Wal-Mart (Charts) and Costco (Charts), which operate on razor-thin margins, have the most to gain here.

Such potential benefits have made this a hot market: research firm IDC says that the workforce management space is the fastest growing segment of so-called "enterprise resource planning" software, which is dominated by titans like Oracle and SAP. IDC projects this niche to grow 17 percent annually through 2010. Sanford Bernstein found that nearly half (44 percent) of retailers it polled plan to purchase new workforce management tools over the next 18 months.

Outdoor outfitter REI, for example, has seen a sales lift of between 1 percent and 4 percent since employing Workbrain's software. How? By assigning staffers knowledgeable in camping, say, at times in the day or month when campers are known to come to the store.

Workbrain's software also allows employees to trade shifts online, and even bid on available shifts in an auction-like format.

Additionally, Workbrain helps ensure that retailers, who employ many teenagers, do not run afoul of labor regulations regarding hours worked by minors. Violations of child labor regulations can result in fines of up to $11,000 per instance. Workbrain is now broadening its compliance services via a partnership with employment law firm Littler Mendelson.

Workbrain's revenues increased 56 percent last year to $89 million and it should break $100 million this year. Founded in 1999, it's currently Canada's second fastest-growing company, according to Profit magazine.

But growing pains are emerging. Like all small software firms, Workbrain lives and dies on acquiring new clients, and a delay in securing two new licenses resulted in a net loss in its most recent quarter. (Workbrain's typical deal generates between $1 million and $1.5 million.) At just over $10 a share, its stock, traded on the Toronto exchange, is well off its 52-week high of $15.

The poor quarter led some analysts, like Lawrence Rhee of Genuity Capital Markets and David Shore of Desjardins Securities, to downgrade Workbrain's stock. "We believe that management has executed its growth strategy to a tee but [it] needs to turn its focus to generating material profitability," wrote Shore in a recent report.

Others, like Wojtek Nowak of Blackmont Capital, remain bullish on the firm's long-term prospects. As long as retailers continue to try to squeeze every last dime our of their labor costs, Workbrain should get through this rough patch and continue to thrive.