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Avon (AVP) Q3 Earnings Miss, Updates Transformation Plan

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Avon Products Inc. reported adjusted earnings from continuing operations of 2 cents per share for third-quarter 2016, a penny short of the Zacks Consensus Estimate of 3 cents. However, results compared favorably with a loss per share of 11 cents incurred in the year-ago quarter.

Despite the earnings miss, shares of this beauty products retailer gained nearly 8% in the pre-market trading session probably due to the strong year-over-year performance and favorable updates on its Transformation Plan.

On a reported basis, the company posted earnings of 7 cents per share against a loss of $1.51 per share in the year-ago quarter.

Deeper Insight

Total revenue fell 2% year over year to $1,408.8 million and missed the Zacks Consensus Estimate of $1,438 million. On a constant currency basis, total revenue improved 4%.

Active Representatives remained flat with last year, while Ending Representatives rose 1%. Both Active and Ending Representatives gained from an improvement in Europe, Middle East & Africa and South Latin America, neutralized by decreases in the Asia Pacific region. Average orders were up 4% due to an increase in all reportable segments stemming from better prices.

Adjusted gross margin contracted 60 basis points (bps) year over year to 60.9%, mainly due to negative currency effects, partly negated by inflationary and strategic pricing, and lower supply chain expenses.

Adjusted operating profit surged 78.7% to $99 million, while adjusted operating margin expanded 310 bps to 7%. Operating margin benefited from the improved price/mix and synergies from cost-saving initiatives, offset by adverse currency movements.

Segment Performance

Avon’s revenues of $476.4 million in Europe, the Middle East and Africa declined 4% year over year. However, on a currency neutral basis, revenues rose 2%, mainly driven by a 1% increase in both Active Representatives and average orders. Growth in Active Representatives was mainly backed by strength in Russia, while average orders increased in the U.K. Price/mix in the region went up 3%, while units sold declined 1%. Ending Representatives grew 5%.

Revenues in South Latin America increased 4% year over year to $594.8 million and 9% in constant-dollars, mainly backed by 7% growth in average orders and 2% upside in Active Representatives. However, constant dollar revenues bore a 2 points impact from MVA taxes in Brazil, offset by Argentina’s 5 points contribution to constant dollar revenue growth. Units sold were up 2%, Ending Representatives increased 3%, while price/mix rose 7%.

North Latin America reported a revenue decline of 6% year over year to $196.8 million, while the same increased 3%, on a constant-dollar basis, benefiting from a 3% improvement in average orders. Also, price/mix escalated 9% and units sold fell 6%. While Active Representatives remained flat, Ending Representatives were down 1%.

The Asia-Pacific division’s revenues fell 9% to $132.8 million and decreased 7% in constant dollars. The decline was due to lower revenues in most markets. A 12% fall in Active Representatives contributed largely to the decline, partly offset by 5% growth in average orders. During the quarter, Ending Representatives fell 7% and units sold declined 8%, while price/mix improved 1%.

Financial Details

Avon exited the quarter with cash and cash equivalents of $901.7 million, long-term debt of $2,226.8 million, and shareholders’ deficit of $775.5 million.

Transformation Plan Update

With regard to the Transformation Plan announced in Jan 2016, the company 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 stated that for 2016, the company has accelerated the pace of some 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, through the first nine months of 2016, the company already realized savings of $80 million out of the planned $90 million.

AVON PRODS INC Price, Consensus and EPS Surprise

AVON PRODS INC Price, Consensus and EPS Surprise | AVON PRODS INC Quote

Zacks Rank

Avon currently carries a Zacks Rank #2 (Buy). Investors can count on other well-ranked stocks like DSW Inc. , sporting a Zacks Rank #1 (Strong Buy), as well as American Eagle Outfitters Inc. (AEO - Free Report) and Boot Barn Holdings Inc. (BOOT - Free Report) , each with a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

DSW Inc. has an average earnings beat of 24% in the last four quarters and estimates for the current fiscal year moved up in the last 60 days. Moreover, the company has a long-term EPS growth rate of 8.3%.

American Eagle has a positive record of earnings surprises in the trailing four quarters, with an average beat of 9.3%. The stock has seen positive estimate revisions for the current fiscal year, over the last 90 days and a long-term EPS growth rate of 11.8%.

Boot Barn Holdings has posted in-line results in the last two quarters. Estimates for the current fiscal year have moved up in the last seven days and the company has a long-term EPS growth rate of 14.5%.

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