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Morningstar | A Soft European Market Continues Vexing Manpower in Its Third-Quarter Results

No-moat rated Manpower continues facing a challenging operating environment and, consequentially, this flowed through to the firm’s third-quarter operating results. Even so, our fundamental outlook is unchanged. We don’t anticipate materially altering our $112 fair value estimate (with some bias to the downside). Europe has been soft recently, and the company highlighted this weakness during the call, but so has the environment in the United States. Year over year, the firm lost 4% in U.S. revenue on a constant currency basis for U.S. revenue of $633.2 million (which includes fees from the firm’s franchise fees). As for France, the firm’s revenue was relatively stagnant for a total of $1.46 billion in the third quarter, down 0.6% year over year on a constant currency basis.

Worse still, operating results in other parts of Europe were also mired, and Northern Europe’s revenue fell 3.9% year over year for total revenue of about $1.29 billion. Right Management fell by 7.5% on a constant currency basis to $47 million. Right is a career transition and organization consulting services provider, which was driven by reduced outplacement activity. Obviously, a tight labor market translates to decreased demand for these types of services. That said, on the bright side, this does represent an improvement from 10% constant currency decline in the second quarter. Management expects that this mid- to high-single-digit year-over-year decline will continue in the fourth quarter.

In total, management admitted on the call that the European environment has been more challenging than expected. The Purchasing Managers’ Index, which is a survey compiled and released monthly by the Institute for Supply Management and tracks economies' activity in the manufacturing sector, totaled 59.8% but grew at a slower pace. According to Manpower, employers now see some headwinds like new government, automotive overcapacity, and uncertainty around Brexit. That said, we see most of these areas of weakness as both short-term and resolvable.

Margins also faced some headwinds recently, but some of these effects were outside of management’s control and are truly one-time impacts. Specifically, the Macron government reduced the EUR 20 billion tax credit for employment and competitiveness (CICE) from 7% to 6%, which impacted Manpower’s France segment’s gross margin. However, based on our reading of the press release, the firm was able to offset some of this impact through pricing. On a constant currency basis, France operating profits only dropped less than 1% year over year to $209.5 million. Even with these headwinds, total firm operating profits rose over 1% on a constant currency basis to $578.8 million.