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On Jun 12, we upgraded global beauty company, Avon Products Inc. (AVP - Analyst Report) to Outperform based on its improved prospects. Avon Products, which sells cosmetics, fragrances, toiletries, jewelry, and accessories, became a Zacks Rank #1 (Strong Buy) stock after reporting impressive first-quarter results.

Why the Upgrade?

Avon has been witnessing rising earnings estimates on the back of better-than-expected bottom-line results in the first quarter of 2013, driven by improving margins. For the second consecutive quarter, this global beauty company’s earnings per share beat the Zacks Consensus Estimate after reporting lower-than-expected earnings in the past 6 quarters.

Moreover, we believe that Avon’s strategic move of improving the health of its balance sheet through refinancing activities induced an upward movement in the estimates. For fiscal 2013 and 2014, the Zacks Consensus Estimate moved up by 9.5% and 6.9% to $1.15 and $1.40 per share, respectively, in the last 60 days.

Of late, Avon has been encountering challenges on various fronts including declining top and bottom lines and a highly-leveraged balance sheet. In Nov 2012, Avon outlined some strategic measures focused on accelerating top-line growth, trimming down costs and improving working capital. We believe the company’s turnaround strategies aimed at accelerating the top-line growth, trimming down costs and improving working capital are paying off, as evident from its improved operating results in the last 2 quarters.

We note that the company has been making significant progress in improving the health of the balance sheet by its refinancing activities and is reducing costs by slashing jobs and exiting operations in underperforming markets. We also remain optimistic regarding the company’s targets of improving the top line in the mid-single-digit range and operating margin in the low-double-digit range, while bringing down costs by $400 million by 2016.

Other Stocks to Consider

Apart from Avon, Nu Skin Enterprises Inc. (NUS - Snapshot Report) with a Zacks Rank #1 (Strong Buy) is performing well in the soaps-cosmetics industry. Other stocks in the same sector that warrant a look include ZEP Inc. (ZEP - Snapshot Report) and Inter Parfums Inc. (IPAR - Snapshot Report), both of which carry a Zacks Rank #2 (Buy).

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