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Analyst Blog

We are maintaining our long-term ‘Underperform’ recommendation on Avon Products Inc. ((AVP - Analyst Report)). This New York-based cosmetics giant posted disappointing results for the sixth straight quarter and recorded lower-than-expected sales and earnings for the third quarter 2012.

Dismal Quarterly Performance Drags Estimates Down

Weak sales and higher input and operating costs continued to weigh on the bottom-line performance of the company. The company’s adjusted earnings per share plunged 55.2% year over year to 17 cents and also fell short of the Zacks Consensus Estimate of 23 cents per share. Total revenue declined 7.7% year over year to $2.551 billion while missing the Zacks Consensus Estimate of $2.591 billion.

We believe Avon’s shift of focus from representative growth, technological upgradation and lack of attention towards commercial sales and unfavorable product mix were the reasons behind its stalled performance. As a result, the company reported a decline in its revenue in every region it operates.

Following dismal bottom-line performance for the third quarter of fiscal 2012, the Zacks Consensus Estimates has been showing a downward trend. For 2012 and 2013, the Zacks Consensus Estimate dropped by 7 cents and 8 cents to 76 cents and 92 cents per share in the last 60 days, respectively.

Negative Earnings Surprise History

Avon has missed the Zacks Consensus Estimate in the trailing six quarters in the range of negative 64.3% to negative 2.0%. The average surprise over the last six quarters remained negative at 23.3%.

Risk of Operating in Overseas Market

Avon’s financial performance may be substantially affected by its significant presence in international market (81% of total revenue in fiscal 2011), which exposes it to unfavorable foreign currency translations, economic or political instability and other governmental actions on trade and repatriation of foreign profits.

Competitive Pressure

Avon faces competition from various products and product lines both domestically and internationally. The beauty and beauty-related products industry is highly competitive and the number of competitors and degree of competition in this industry varies widely from country to country. Worldwide, Avon competes against products sold to consumers by other direct-selling and direct-sales companies and through the Internet and against products sold through the mass market and prestige retail channels.

Based on the above analysis, we anticipate Avon to perform below its peers. Therefore, we see little reasons for the investors to own this stock. Avon, which competes with Revlon Inc. , carries a Zacks #5 Rank, implying short-term Strong Sell rating for the next 1-3 months.

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