Avon (AVP) Falls on Q3 Earnings Miss, Sales Beat Estimates

Avon Products Inc. AVP continued its dismal earnings surprise trend for the fifth straight quarter in third-quarter 2017. However, the company’s revenues reversed its negative surprise trend after four consecutive misses. Also, both the top and bottom lines improved year over year. Though the company is witnessing improving trends in various markets, management issued a soft outlook for 2017.

Shares of Avon declined 9.3% yesterday, following third-quarter earnings. Overall, the company’s shares have lost 27.9% in the last three months, underperforming the industry’s growth of 6%.

Notably, Avon posted adjusted earnings from continuing operations of 3 cents per share in the third quarter, lagging the Zacks Consensus Estimate of 7 cents. However, the reported figure increased by a penny from the prior-year quarter. We note that the bottom line was pressured owing to a tough environment and comparison in Brazil.

On a reported basis, the company posted earnings per share of 1 cent compared with 7 cents in the year-ago quarter.

Deeper Insight

Total revenues grew 1% year over year to $1,417.8 million and also came ahead of the Zacks Consensus Estimate of $1,409 million. On a constant currency basis, total revenues remained flat.

While Active Representatives declined 3% compared with the prior-year quarter, Ending Representatives dipped 2%. This is because Active Representatives and Ending Representatives were hurt by decline in various segments. However, average orders were up 3% owing to growth in all segments, mitigated by flat Europe, Middle East & Africa (EMEA) orders. While total units sold dipped 5%, price/mix improved 5%.

Adjusted gross margin expanded 30 basis points (bps) year over year to 61.2%, mainly on the back of positive impact from price/mix.

However, adjusted operating margin contracted 70 bps to 6.3%. The year-over-year decline was due to higher bad debt expenses, alongside increased Representative, sales leader and field expenses, all mainly in Brazil. These factors were partly negated by positive lower incentive compensation plan costs and lower fixed costs that include cost-reduction gains from the Transformation Plan.

Segment Performance

Avon’s revenues of $482.8 million in Europe, Middle East & Africa inched up 1% year over year. On a currency neutral basis, revenues dipped 2%, mainly owing to a 2% drop in Active Representatives. However, average orders remained flat. While price/mix in the region increased 3%, units sold declined 5%. Ending Representatives rose 1%.

Revenues in South Latin America decreased 1% year over year to $589.7 million and remained flat in constant-dollars, mainly owing to 6% decline in Active Representatives, offset by 6% growth in average orders. While price/mix increased 7%, units sold were down 7%. Ending Representatives also declined 6%.

North Latin America’s revenues rose 5% year over year to $206 million and also increased 2% in constant-dollars attributable to 1% growth in both Active Representatives and average orders. While price/mix grew 5%, units sold fell 3%. However, Ending Representatives inched up 1%.

The Asia-Pacific division’s revenues declined 1% to $130.1 million but increased 3% in constant dollars, mainly owing to 3% improvement in average order. While Active Representatives and price/mix remained flat, units sold was up 3%. Further, Ending Representatives dipped 3%.

Financial Details

Avon ended the third quarter with cash and cash equivalents of $663.8 million, long-term debt of $1,873 million and total shareholders’ deficit of $820.5 million (excluding non-controlling interests).

Transformation Plan Update

Avon is in the second year of its three-year Transformation Plan that was announced in January 2016. The plan mainly focuses on investing in growth, enhancing cost structure and improving financial flexibility. Crossing the half-way mark of the plan period, the company has witnessed significant progress compared with its targets of enhancing cost structure and improving financial resilience.

In 2016, the company surpassed cost saving targets, realizing cost savings of roughly $120 million and considerably improved balance sheet as it reduced debt by about $260 million and extended maturity profile.

In 2017, the company targets cost savings of $230 million including run-rate savings from 2016 along with in-year savings from current-year initiatives. Per Avon, savings realized through the nine months of 2017 indicates that it has roughly $25 million of savings target outstanding for the year.

Going forward, management is likely to focus on the business foundations and improve overall performance to attain its savings target. Though Avon is facing challenges, it is expected to focus on investment in modernizing systems, delivering unique and competitive Representative experience. Further, it aims to provide deeper insights and analytics into Representative’s behavior and requirements to boost experience.

In fact, the company also remains encouraged to minimize service disruption along with pilot programs that cover service from end to end.

Outlook

Following the mixed quarterly results and favorable trends, management expects modest growth in the fourth quarter of 2017. Though management remains focused to drive growth through innovations, solid team execution, improving Representative experience, it will take time to realize the benefits from its strategies.

Furthermore, Avon expects results to fall short of expectations in 2017. The company now expects both constant-dollar revenues and adjusted operating margin in the band of flat to slightly up compared with the prior-year period. Also, it expects to achieve cost savings target and generate positive free cash flow for 2017 on the back of slower-than-anticipated capital expenditures in the current year.

Zacks Rank & Other Stocks to Consider

Avon holds a Zacks Rank #2 (Buy). Investors can count on other top-ranked stocks in the broader Consumer Staples sector, which include The Estee Lauder Companies Inc. EL, Inter Parfums, Inc. IPAR and Energizer Holdings, Inc. ENR. While Estee Lauder sports a Zacks Rank #1 (Strong Buy), Inter Parfums and Energizer Holdings carry a Zacks rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Estee Lauder, with a long-term earnings growth rate of 12.1%, has pulled off an average positive earnings surprise of 18% in the trailing four quarters.

Inter Parfums, with a long-term earnings growth rate of 12.3%, has come up with an average positive earnings surprise of 18.1% in the trailing four quarters.

Energizer, with a long-term earnings growth rate of 9.9%, has delivered an average positive earnings surprise of 23% in the past four quarters.

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