We have downgraded our long-term recommendation on Avon Products, Inc. (AVP) to Underperform following the weak quarterly performance in the third quarter of 2011. The quarterly earnings of $0.38 per share fell short of the Zacks Consensus Estimate of $0.46 and dipped 7.3% from the year-ago quarter battered by increased product costs.
The North American market continues to be sluggish in the ongoing fiscal 2011. Moreover, the company's initiatives to change the product mix and reposition the business in the U.S. market will require significant expenditure to support increased advertising and promotional activities, which may dent its margins.
Furthermore, Avon is a highly leveraged company, limiting its financial flexibility to drive future growth. Additionally, the company faces stiff competition from other well established players and has significant exposure to foreign currency translations.
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