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Avon's 1Q Misses on Higher Costs

AVP

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Avon Products Inc. (AVP - Analyst Report) recently posted first-quarter 2012 adjusted earnings of 10 cents a share, missing the Zacks Consensus Estimate of 28 cents a share. Moreover, the results decreased nearly 73% from the year-ago earnings of 37 cents a share, primarily due to higher input cost inflation coupled with higher labor costs and increased operating expenses.

On a reported basis, including one-time items, earnings fell 81.8% to 6 cents per share compared with earnings of 33 cents in the year-ago quarter.

During the quarter, the company’s net sales inched down 2% year over year to $2,575.4 million compared with $2,629.1 million a year ago. The decline in sales was mainly attributable to a fall of 1% in total units, partially offset by benefit from favorable price mix. However, net sales beat the Zacks Consensus Estimate of $2,519 million.

Avon registered a revenue decline in every category of products with fashion products dropping 8%, followed by a fall of 2% and 1% in the company’s Home and Beauty Products categories, respectively.

Sales by Region

Avon delivered 1% revenue growth in Latin America, primarily driven by an increase of 2% and 26% in Mexico and Venezuela, respectively, partially offset by a 4% decline in Brazil.  Units sold inched down 1% during the quarter, while Active representatives grew 2% year over year.

In North America, sales decreased 4% year over year, down 2% in US business, while active representatives fell 10%. However, units sold in the region during the quarter inched up 1% year over year.

The beauty product maker’s revenues in Western Europe, Middle East and Africa plummeted 5% year over year, primarily due to weak performances in the U.K and Continental European region.  Avon registered a 4% fall in active representatives, while units sold were up by 2% during the quarter.

Intense competitive pressures continued to hamper Central and Eastern Europe revenue, which recorded a 4% drop in the quarter along with a 5% fall in unit volume. The region marked a 1% drop in active representatives and a 1% revenue decline in Russia.

The Asia-Pacific division witnessed a 2% decline in revenues. The region marked 9% decline in Active representatives and 3% fall in units sold.

Margin Contraction

Avon’s adjusted gross margin fell 310 basis points year over year to 60.8%, primarily due higher product costs, increased labor costs, and unfavorable foreign currency translation effect and product mix. Adjusted operating profit reflected a decline of 71.6%, while operating margin contracted 610 basis points to 3.8% attributable to lower sales and gross margin and higher operating expenses.

Other Financial Details

The leading global beauty company exited the quarter with cash and cash equivalents of $1,215.2 million, long-term debt (excluding current maturities) of $2,201.8 million, and shareholders’ equity of $1,636.1 million.

During the three-month period ended March 31, 2012, the company uses a net cash of $33 million for operational activities versus $31.6 million in the same period last year. The company expended $45.7 million in capital expenditure.

Guidance

Battered by continuous wretched quarterly performance and macroeconomic pressures, the company is actively focusing on its top-line growth, cash generation and cost management in the current fiscal with least focus on margin recovery, reflecting a year of changeover for Avon.

Avon Products is a leading global beauty company, and as the world's largest direct seller of beauty and related products, targets women consumers in over 100 countries through 6.4 million independent sales representatives. The company also derives a substantial portion of its revenue from high-growth emerging markets, offering a significant future upside potential.

Globally, Avon competes against products sold to consumers by other direct-selling companies and direct-sales through the Internet and against products sold in the mass market and through prestige retail channels. The company faces stiff competition from Revlon Inc. .

Avon currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. Our long-term recommendation on the stock is Neutral.

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