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Retail Weakness Keeps Hammering Manhattan Associates

The retail industry has to handle a lot of logistics, and Manhattan Associates (NASDAQ: MANH) aims to make retailers' jobs a little easier by helping them manage their supply-chain needs through innovative software platforms. Manhattan's cloud-based offerings have put the company in the right place at the right time, and as the business has grown, shareholders have found themselves rewarded for their patience.

Yet coming into Tuesday's third-quarter financial report, Manhattan investors needed to see evidence that the company would be able to bounce back from some tough quarters recently, which, in turn, reflected the general weakness among its retailer customer base. Manhattan's results were reasonably solid, but they didn't give shareholders enough optimism to dispel worries about the company's future. Let's look more closely at how Manhattan Associates did and what lies ahead for the business.

Image source: Manhattan Associates.

Manhattan Associates declares victory

Manhattan Associates' third-quarter results were better than many had feared, but nevertheless reflected a difficult environment for its customers. Sales were up a fraction of a percent, to $152.9 million, but that was a win compared to the modest decline that most of those following the stock were prepared to see. Adjusted net income was down 2%, to $35 million, but a substantial drop in share count led to a slight rise in adjusted earnings, to $0.51 per share, beating the consensus forecast for $0.49 per share.

Surprisingly, the biggest area of strength for Manhattan came from the hardware division. Segment sales there jumped by nearly two-thirds, marking an unusual uptick in what has become a relatively unimportant part of the overall business. By contrast, the services segment and the software-licensing business both suffered year-over-year declines on their top lines, although a drop in the cost of providing services led to an overall increase in gross income from that unit. Boosts to research and development costs, along with sales and marketing expenses weighed on Manhattan's bottom line, although a decline in provisions for income taxes owed helped cushion the blow.

Manhattan Associates suffered a reversal in terms of where it got its business during the quarter. Sales in the Americas were down about 4% compared to the third quarter of 2016, and adjusted operating income declined by double-digit percentages. Both the European and Asia-Pacific regions enjoyed much better performance. Europe posted gains of more than a fifth on the top line and nearly half on segment profit, while Asia-Pacific enjoyed gains of more than a third for segment sales and a near doubling of operating income.

Yet licensing business remained fairly slow. For the third quarter in a row, Manhattan brought in just four new contracts with licensing revenue of $1 million or more. New customers included the Johns Hopkins Health System, while expanded relationships with existing clients included Texas-based HEB Grocery and Burlington Coat Factory.

What's next for Manhattan Associates?

CEO Eddie Capel again claimed that the quarter was good in light of industry conditions. "Q3 represents the first full quarter post-launch of our Manhattan Active Solutions suite," Capel said, "and we are very pleased with the market's enthusiasm for our Manhattan Active Omni cloud solution." The CEO said that demand affirmed Manhattan's strategic decision to follow a cloud delivery model in its business.

Yet even though the results were slightly better than many had expected, Manhattan Associates didn't make any positive changes to its full-year 2017 guidance. Manhattan still thinks that revenue will fall between 1% and 2% to a range of $590 million to $600 million, and adjusted earnings guidance of $1.85 to $1.89 per share makes it clear that investors shouldn't expect an immediate boost to profits from the company's turnaround efforts.

Shareholders in Manhattan Associates weren't happy with that news, and the stock plunged almost 10% in after-hours trading following the announcement. If retail bounces back, then investors should be able to see whether Manhattan can take advantage. Until it does, though, many of those following the stock seem reluctant to put too much confidence in the cloud-based solutions provider.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Manhattan Associates. The Motley Fool has a disclosure policy.