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Avon Products Inc. (AVP - Analyst Report) posted a disappointing second-quarter 2012 with adjusted earnings falling over 59% to 20 cents a share from 49 cents in the year-ago quarter due to lower sales coupled with higher input cost inflation and increased operating expenses. Moreover, quarterly earnings fell short of the Zacks Consensus Estimate of 21 cents per share.
On a reported basis, including one-time items, earnings fell 70.2% to 14 cents per share compared with 47 cents recorded in the year-ago quarter.
During the reported quarter, the company’s total revenue declined 9% year over year to $2,591.7 million compared with $2,856.4 million a year ago. The decline in sales was mainly attributable to a fall of 4% in total units, partially offset by a benefit of 3% from favorable price mix. Moreover, total revenue missed the Zacks Consensus Estimate of $2,685.0 million.
Avon registered a revenue decline in every category of products with Home products dropping 12%, followed by Fashion and Beauty Products categories exhibiting declines of 10% and 9%, respectively.
Avon’s adjusted gross margin fell 160 basis points year over year to 62.8%, primarily due higher product costs and effect of unfavorable foreign currency translation. Adjusted operating profit dwindled 41.7%, while operating margin contracted 510 basis points to 6.4% attributable to lower sales and gross margin along with higher operating expenses.
Avon delivered 9% revenue decline in Latin America, primarily due to 19% and 7% declines in Brazil and Mexico, respectively, partially offset by a 26% rise in Venezuela. Units sold declined 3% during the quarter, while Active representatives inched up 1% year over year.
Adjusted operating profit plunged 38% to $122 million, while adjusted operating margin contracted 470 basis points (bps) to 9.8%. The year-over-year contraction in margin was primarily due to lower gross margin as well as increased overhead expenses.
In North America, sales decreased 6% year over year, with U.S. core business declined 4%, while active representatives fell 12%. Units sold in the region during the quarter declined 4% year over year.
Accordingly, the company’s adjusted operating profit plunged 94% year over year to $1.9 million and adjusted operating margin shrunk 600 bps to 0.4%, owing to lower gross margin, higher overhead costs and implementation of One Simple Sales Model.
The beauty product manufacturer’s revenues in Europe, Middle East and Africa slipped 14% year over year, primarily due to weak performances in every region. Avon registered a 3% fall in active representatives, while units sold were down by 7% during the quarter.
Adjusted operating profit plummeted 39% to $79.4 million during the quarter, while as a percentage of sales it contracted 480 bps to 12%. Low revenue and high brochure costs coupled with bad-debt expenses dragged the adjusted operating margin downwards.
The Asia-Pacific division witnessed a 4% dip in revenues. The region marked a 7% decline in Active representatives and a 6% fall in units sold. Adjusted operating profit in the region dropped 8% to $15.2 million, while as a percentage of sales it contracted 30 bps to 7% due to lower gross margin along with higher bad-debt expenses.
Other Financial Details
The leading global beauty company exited the quarter with cash and cash equivalents of $1,276.4 million, long-term debt (excluding current maturities) of $2,581.1 million, and shareholders’ equity of $1,423.0 million.
During the six-month period ended June 30, 2012, the company earned net cash of $41.1 million for operational activities as against $101.2 million in the comparable quarter last year. Avon expended $87.7 million in capital expenditure.
Battered by continuously wretched quarterly performance and macroeconomic pressures, Avon is actively focusing on its top-line growth, cash generation and cost management in the current fiscal year, reflecting a year of changeover.
This global beauty company is the world's largest direct seller of beauty and related products. It 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, which offers a significant upside potential for the future.
Globally, Avon competes against direct-selling companies, online retailers and products that are sold in the mass market through prestigious retail channels. The company faces stiff competition from another beauty products giant, Revlon Inc. .
Avoncurrently retains a Zacks #4 Rank, which translates into a short-term Sell rating. Our long-term recommendation on the stock is Underperform.