Avon Products Inc. AVP reported better-than-expected top and bottom line results for second-quarter 2015 despite continued pressure from a volatile currency backdrop. Adjusted earnings of 11 cents per share from continuing operations came in ahead of the Zacks Consensus Estimate of 7 cents. However, earnings declined by 45% from 20 cents posted in the year-ago quarter.
Further, on a reported basis, the company posted earnings per share of 7 cents from continuing operations compared with 4 cents in the year-ago comparable quarter, marking an improvement of 75%.
Total revenue for the quarter declined 17% year over year to $1,823.4 million from $2,188.6 million. However, the top line surpassed the Zacks Consensus Estimate of $1,805 million. On a constant currency basis, total revenue remained fairly unchanged. During the quarter, a significant fall in North American revenue was offset by strength in Europe, Middle East & Africa and Latin America.
During the quarter, the global beauty company registered an increase of 4% in price/mix driven by higher prices in regions with high inflation along with better price/mix in Brazil, while total units fell 4% owing to decline in North America and Latin America.
Active Representatives slipped 2% year over year mainly due to decrease in North America, offset by growth in Europe, Middle East & Africa, particularly in Russia. Average orders were up 2%, gaining from higher prices in markets experiencing high inflation, mainly Venezuela and Argentina.
Avon registered declines of 17% and 14% in its Beauty Products and Fashion & Home segment revenues, respectively. On a constant dollar basis, sales of Beauty Products rose 1%, while sales of Fashion & Home remained unchanged.
Adjusted gross margin of this Zacks Rank #4 (Sell) company contracted 180 basis points (bps) year over year to 61.2% on account of negative currency effects, offset by improved price/mix.
Adjusted operating margin fell 250 basis points (bps) to 6%, mainly due to foreign currency headwinds, offset by gains from the company’s ongoing cost saving initiatives and improved price/mix.
Regional Performance
Avon’s revenues in Latin America fell 19% year over year to $853.5 million, while it rose 3% on a constant-dollar basis owing to an increase in average orders due to inflationary impact on pricing, offset by a reduction in Active Representatives. Units sold were down 5%, price/mix rose 8% and Active Representatives slipped 3%.
In North America, sales skidded 15% year over year to $258.6 million, mainly due to a fall in Active Representatives. On a constant dollar basis too, revenues were down 14%. Units sold for the region dropped 19% year over year, while Active Representatives slipped 16%.
Avon’s revenues of $552.9 million in Europe, the Middle East and Africa fell 16% year over year. However, on a currency neutral basis, revenues increased 6%, mainly driven by 6% increase in Active Representatives, on account of strength in Russia. Price/mix in the region improved 4% while units sold grew 2%.
The Asia-Pacific division’s revenue fell 8% to $158.4 million, while in constant dollars revenue dipped 4%. The higher average orders during the quarter, particularly in Philippines, were more than offset by declines in other markets like China. The region marked a 5% decline in Active Representatives and 7% fall in units sold. On the other hand, average order and price/mix increased 1% and 3%, respectively.
Other Financial Details
Avon exited the second quarter with cash and cash equivalents of $696.9 million, long-term debt (excluding current maturities) of $2,203.6 million and shareholders’ equity of $62.2 million.
Moreover, in conjunction with the earnings release, the company announced a quarterly dividend of 6 cents, payable on Sep 1, 2015, to shareholders of record as on Aug 13.
2015 Outlook
For 2015, the company retained its previously provided guidance. However, the company now expects constant-dollar and reported revenue in the second half of 2015 to bear an additional 1 percentage point impact from sale of the Liz Earle business. The company’s previous guidance projected a modest improvement in revenues on a constant-dollar basis compared with 2014.
However, based on the foreign currency spot rates, management anticipated 2015 total revenue to bear negative impact of nearly 17 percentage points from foreign currency translation.
Additionally, the company continues to expect constant dollar adjusted operating income for the year to decline 50 basis points year over year due to the introduction of a new Industrial Production Tax (‘IPI’) law on cosmetics in Brazil, effective May 1. Also, it expects adjusted operating income, in dollar terms, to decline 200 basis points year over year, bearing the impact of both negative currency translations and IPI.
Stocks to Consider
A stock to consider in the same industry is Coty Inc. COTY with a Zacks Rank #2 (Buy). Other stocks worth considering in the broader consumer staples sector include Clorox Inc. CLX and Newell Rubbermaid Inc. NWL, both carrying a Zacks Rank #2.
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