Randstad signals third-quarter margin pressure despite improved volumes

Investing.com -- Randstad (AS:RAND) on Wednesday said that gross profit margins are expected to decline in the third quarter, even as volumes show signs of improvement, pointing to ongoing earnings pressure for the staffing company.

The recruitment company reported second-quarter revenue of €5.79 billion, down 5% from a year earlier but 1% ahead of consensus estimates. 

Organic growth declined 2.3%, which outperformed analyst expectations of a 3.5% drop. Foreign exchange effects weighed on revenue by 2%, while merger and acquisition activity and trading day effects were neutral.

Gross profit came in at €1.09 billion, with the gross profit margin falling 90 basis points to 18.9%. 

The decline was slightly below consensus estimates of 19%. Temporary staffing contributed a 40-basis-point hit, permanent placements reduced margin by 20 basis points, and human resource solutions and other activities, including Monster, accounted for a 30-basis-point decline. Currency movements subtracted an additional 10 basis points.

Adjusted EBIT fell 6% year over year to €171 million, narrowly beating the consensus forecast of €170 million. 

Selling, general and administrative expenses declined 9.7% year over year to €923 million, supported by a 6% year-over-year reduction in full-time employees and a further 2% decrease from the previous quarter.

Adjusted earnings per share dropped 28% year over year to €0.48, 20% below consensus expectations of €0.60. 

The shortfall was attributed to higher finance costs totaling €48 million, which included €32 million in fair value adjustments and impairments related to loans to Monster.

Free cash flow rose to €82 million, compared with €16 million a year ago. The increase was driven by lower working capital outflows, which improved to €26 million from €92 million in the prior-year period.

Randstad said that volumes improved through the second quarter, with June ending above the quarterly average. 

Early July trends remained stable compared to June, which suggests sequential improvement in organic growth. 

However, the company guided for lower gross profit margins and SG&A expenses in the third quarter. “We believe this suggest 3Q adj. EBIT at around EUR180m, or c.5% below current consensus of EUR189m (JEFe EUR179m),” said analysts at Jefferies in a note.

“Overall, we expect a MSD cut to 3Q consensus adj. EBIT. Although the market could focus on the better top line today, we note the stock rose 15% over the past month & this was probably expected following MAN 2Q release last week,” Jefferies added.