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The Football League First Division of 1938-39 had already been won by Everton by the time that Kelly was appointed as full-time manager. The League was then suspended for seven seasons during the war though some matches were played with Kelly in charge.

After the war Kelly disagreed with Joe Mercer , whom he sold to Arsenal and was unable to persuade Tommy Lawton to stay. He also attempted to sell T.G. Jones to A.S. Roma to raise £15,000, but exchange control prevented the transfer. Many players saw him as a remote, autocratic and petty figure. Dixie Dean said that the main reason for leaving Everton in 1937 was Theo Kelly. Kelly distrusted players bought on the transfer market and so the playing resources were quickly depleted.

Kelly was better known for his administrative skills and he left the club in a better financial state. After two poor seasons (finishing 10th and 14th) and a poor start to the 1948-49 season in which Everton finished 18th, Kelly resigned as manager in September 1948 and reverted to being club secretary. Cliff Britton replaced him as manager.