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Why Is Avon Products (AVP) Up 13.2% Since Its Last Earnings Report?

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It has been about a month since the last earnings report for Avon Products, Inc. . Shares have added about 13.2% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is AVP due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Avon Q4 Earnings Beat, Sales Miss Estimates

Avon posted adjusted earnings from continuing operations of 12 cents per share in the fourth quarter, beating the Zacks Consensus Estimate of 6 cents. Additionally, it reflected a significant improvement from earnings of 1 cent per share in the prior-year quarter. Bottom line gained from considerable margin expansion from lower bad-debt expenses and benefits from cost reduction initiatives, alongside tax gains from the recently enacted tax reform.

On a reported basis, the company posted earnings per share of 17 cents against loss of 3 cents in the year-ago quarter.

Deeper Insight

Total revenues remained flat year over year at $1,568.8 million but lagged the Zacks Consensus Estimate of $1,592 million. On a constant-currency basis, the metric declined 2%, mainly due to the declination of Active Representatives, particularly in Brazil.

While Active Representatives declined 2% compared with the prior-year quarter, Ending Representatives remained flat. Moreover, average orders came in flat, with both total units sold and price/mix dropping 1% each.

Adjusted gross margin expanded 80 basis points (bps) year over year to 61.1%, mainly on the back of a positive impact from price/mix.

Adjusted operating margin expanded 250 bps to 9.8%. The year-over-year increase was owing to lower bad-debt expenses, particularly in Brazil, and lower fixed–costs, primarily related to the gains from cost reductions under the Transformation Plan. These factors were partly negated by higher Representative, sales leader and field expense to drive Representative activity.

Segment Performance

Avon’s revenues of $641.6 million in Europe, Middle East & Africa rose 3% year over year. On a currency-neutral basis, the top line dipped 2% mainly due to 3% drop in average orders, offset by 1% increase in Active Representatives. The decline can also be attributed to the fall in constant-dollar revenues in Russia and the U.K., offset by gains in Turkey with mixed results in rest of the segment. While price/mix in the region dipped 2%, units sold remained flat. Ending Representatives rose 3%.

Revenues in South Latin America decreased 2% year over year to $575.4 million and were down 1% in constant dollars, mainly owing to 4% decline in Active Representatives, offset by 3% growth in average orders. Also, the top line was impacted by the fall in Brazil, partly negated by growth in Argentina. Price/mix dipped 1% and Ending Representatives fell 3%, while units sold were flat.

North Latin America’s revenues were flat at $204.8 million and declined 2% in constant dollars, attributable to 3% fall in Active Representatives, including the impact of the September 2017 earthquake in Mexico, offset by 1% increase in average orders. While price/mix grew 2%, units-sold fell 4%. Moreover, Ending Representatives declined 2%.

The Asia-Pacific division’s revenues declined 3% to $139.3 million and down 2% in constant dollars, mainly owing to 1% decline in both Active Representatives and average orders. Additionally, price/mix, units sold and Ending Representatives dropped 1% each. During the quarter, constant-dollar revenue growth in the Philippines was offset by declines in most other markets in the segment.

Financial Details

Avon ended 2017 with cash and cash equivalents of $881.5 million, long-term debt of $1,872.2 million and total shareholders’ deficit of $714.7 million (excluding non-controlling interests).

Transformation Plan Update

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

In 2017, the company surpassed the cost-saving target of $230 million for the year, realizing cost savings of more than $250 million. Cost savings for the year include both run-rate savings from 2016 and in-year savings from current year initiatives. These savings were mostly offset by the impact of inflation.

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.

Avon expects to achieve the long-term target of delivering the mid-single-digit constant-dollar revenue growth and low double-digit operating margin. However, the company believes that this will take time. Moving ahead, it anticipates 2018 to be a year of executing significant operational improvements despite continued competitive pressures.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a flat path over the past two months.

Avon Products, Inc. Price and Consensus

VGM Scores

At this time, AVP has a strong Growth Score of A, though it is lagging a lot on the momentum front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is equally suitable for value and growth investors while momentum investors may want to look elsewhere.

Outlook

AVP has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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