Leading global beauty company, Avon Products Inc. seems to be doing well after a being in a rough patch for quiet sometime due to back-to-back dismal quarterly performances. Though the company’s surprise trend is yet to recover, we believe optimism is creeping into Avon’s stock performance on account of the progress on its Transformation Plan that was announced in Jan 2016.

That said, we note that the company’s share price has seen an uptrend since January this year after bottoming at the end of 2015. Shares of Avon has surged about 33.1% year to date, contrasting a 8.2% decline recorded for the Zacks categorized Cosmetics & Toiletries industry in the same period.

What’s Aiding the Stock?

Avon is mainly gaining from the swift progress on its Transformation Plan that targets bringing down costs over the long term and investing these savings back into growth initiatives like media, IT systems and social selling. As a first step toward the execution of the plan, Avon completed the separation of its North American business in Mar 2016.

With the Transformation Plan underway, Avon is on track to deliver savings of $350 million over a three-year period, including $200 million from supply chain reductions and about $150 million from other cost reductions. In fact, management recently stated that for 2016, the company has accelerated the pace of some of its cost saving efforts, owing to which it is running ahead of schedule in realizing its targeted $70 million cost savings, along with about $20 million savings in stranded costs related to the separation of its North American business. Evidently, the company has already realized savings of $80 million out of the planned $90 million through the first nine months of 2016. Additionally, the company anticipates this plan to help it attain its long-term goal of delivering low double-digit operating margin and constant-dollar revenue growth in the mid-single digits.

Further, with regard to financial resilience, the Transformation Plan has aided Avon in significantly improving its capital structure and strengthening its balance sheet with about $235 million lesser debt levels and an extended maturity profile.

Moreover, this world's largest direct seller of beauty and related products has been focused on turning around its business through boosting Active Representatives. Avon remains on track to reach its long-term Active Representatives growth target of 1–2%. For 2016, the company anticipates Active Representatives to be flat to up 1% for the reportable segments and up 1–2% for its top 10 markets. This inspires optimism about the recovery of Avon’s business as Active Representatives form a key factor for the success of any direct-selling business operator.

Dismal Quarterly Performance Still a Hurdle

However, the company is yet to tide over its waning top and bottom-line trend. Evidently, the company delivered dismal results for third-quarter 2016 as both top and bottom-line fell short of expectations. Further, the company’s revenue plunged year over year. Results were mainly marred by adverse currency fluctuations. As is the case with many retailers with foreign operations, Avon’s third-quarter 2016 results were affected by significant currency headwinds, which weighed on sales (6 points impact) and operating margins (270 basis points impact), and dragged down earnings by 3 cents per share.

A look at Avon’s earnings history also provides a negative picture as the company has underperformed the Zacks Consensus Estimate by an average of 112.5% in the past four quarters. Further, the company anticipates results in 2016 to continue being impacted by currency headwinds.

Though these factors pose concerns about Avon’s quarterly performance, the company’s stock has been doing extremely well getting the needed boost from the Transformation Plan. Now, the primary question is “Will this Momentum in Avon’s Stock Price Sustain?”

Zacks Rank & Key Picks

Avon currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include Helen of Troy Limited (HELE Quick QuoteHELE - Free Report) and Inter Parfums, Inc. (IPAR Quick QuoteIPAR - Free Report) , both carrying a Zacks Rank #2 (Buy). Another stock worth considering in the broader consumer staples sector is Dean Foods Company , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Helen of Troy has a long-term EPS growth rate of 10.8%. Moreover, the company has delivered an average positive earnings surprise of 18.6% in the trailing four quarters.

Inter Parfums has to its credit a long-term EPS growth rate of 15% and has gained 49% year to date.

Dean Foods, with a long-term earnings growth rate of 12%, has surged nearly 21.6% year to date.

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