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Avon (AVP) Down 9% Since Earnings Report: Can It Rebound?

AVP

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A month has gone by since the last earnings report for Avon Products, Inc. (AVP - Free Report) . Shares have lost about 9% in that time frame, underperforming the market.

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

Avon Misses Q4 Earnings; Transformation Plan on Track

Avon Products posted adjusted earnings from continuing operations of $0.01 per share for fourth-quarter 2016, lagging the Zacks Consensus Estimate of $0.09. However, results compared favorably with break-even results in the year-ago quarter.

On a reported basis, the company posted loss per share of $0.03 per share compared with a loss per share of $0.04 in the year-ago quarter.

Deeper Insight

Total revenue fell 2% year over year to $1,568.1 million and missed the Zacks Consensus Estimate of $1,602 million. On a constant currency basis, total revenue remained flat with the prior-year quarter.

Active Representatives declined 3% compared with the prior-year quarter, while Ending Representatives dipped 2%. Active Representatives were hurt by decline in Asia Pacific and Europe, the Middle East and Africa (EMEA). Increase in EMEA and South Latin America benefited Ending Representatives, negated by fall in Asia Pacific. Average orders were up 2% due to an increase in South Latin America, Asia Pacific and North Latin America, partly compensated by a fall in EMEA.

Adjusted gross margin expanded 150 basis points (bps) year over year to 60.3% on the back of pricing gains offset by negative currency impacts.

Adjusted operating profit increased 18% to $114.2 million, while adjusted operating margin expanded 130 bps to 7.3%. Operating margin gained from the improved price/mix, synergies from cost-saving initiatives and decline in compensation expenses, offset by higher bad debt expenses – particularly in Brazil, and adverse currency movements.

Segment Performance

Avon’s revenues of $620.5 million in Europe, the Middle East and Africa declined 7% year over year. On a currency neutral basis, revenues dipped 3%, mainly driven by a 2% fall in Active Representatives and 1% decline in average orders. Price/mix in the region went up 5%, while units sold declined 8%. Ending Representatives grew 3%.

Revenues in South Latin America increased 9% year over year to $589 million and 6% in constant-dollars, mainly driven by 7% growth in average orders partly negated by 1% decline in Active Representatives. Constant dollar revenue growth included a 3 points benefit from higher prices in Argentina. Units sold were down 8%, while Ending Representatives jumped 1% and price/mix rose 14%.

North Latin America reported a revenue decline of 10% year over year to $204.1 million, while the same increased 1%, in constant-dollars, benefiting from a 1% gain in average orders. Also, price/mix escalated 10% while units sold fell 9%. While Active Representatives remained flat, Ending Representatives were down 1%.

The Asia-Pacific division’s revenues fell 9% to $144.5 million and decreased 6% in constant dollars. The decline was due to lower revenues in most markets, neutralized by modest growth in Philippines. A 9% fall in Active Representatives contributed largely to the decline, partly offset by 3% increase in average orders. During the quarter, Ending Representatives declined 11% and units sold fell 5%, and price/mix dropped 1%.

Financial Details

Avon exited 2016 with cash and cash equivalents of $654.4 million, long-term debt of $1,875.8 million, and shareholders’ deficit of $848 million (excluding non-controlling interests).

Transformation Plan Update

In 2016, the company made significant progress toward the Transformation Plan that was announced in Jan 2016. In the first year of this three-year plan, the company surpassed cost saving targets and considerably improved its balance sheet. Evidently, in 2016, the company went ahead of schedule and realized roughly $120 million in savings. For 2016, the company had targeted $70 million cost savings, along with about $20 million savings in stranded costs related to the separation of its North American business.

Further, as part of improving financial resilience, management reduced debt by about $260 million this year, which also surpassed its targeted reduction of $250 million. Moreover, the company’s balance sheet strength was enhanced by the extension of its long-term debt maturity profile to Mar 2019.

Avon’s Transformation Plan mainly focuses on investing in growth, enhancing cost structure and improving financial flexibility. In this regard, management plans to invest nearly $350 million over a three year period starting 2016, including $150 million toward media and social selling; and $200 million for service model evolution and information technology. This is mainly aimed at bolstering the overall Representative experience.

Further, the company is on track to deliver cost savings of $350 million over a three-year period, including $200 million from supply chain reductions and about $150 million from other cost reductions.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been five revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 86.1% due to these changes.

Avon Products, Inc. Price and Consensus

 

Avon Products, Inc. Price and Consensus | Avon Products, Inc. Quote

VGM Scores

At this time, Avon's stock has a great Growth Score of 'A', though it is lagging a lot on the momentum front with an 'F'.  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.

Our style scores indicate that the stock is suitable for both growth and value investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift.  It's no surprise that the stock has a Zacks Rank #5 (Strong Sell). We are expecting a below average return from the stock in the next few months.




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