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Can Avon's Transformation Plans Pull it Out of Doldrums?

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The difficult times seem to be never ending for beauty products company, Avon Products Inc. (AVP - Free Report) as the company’s dismal top-line and bottom-line performance have become the order of the day. While Avon has long been struggling, recent records show that it has lagged both earnings and sales estimates in three of the trailing four quarters. Evidently, the company has delivered a negative earnings surprise of 109.7% in the preceding four quarters.

This dismal trend has also largely weighed down the company’s stock price. The stock has lost a significant 25% since reporting disappointing fourth-quarter 2016 results on Feb 16. Further, it reflects a huge drop compared with the broader industry on a year-to-date basis. Shares of this Zacks Rank #5 (Strong Sell) company have declined 12.7% year to date, while the Zacks categorized Cosmetics industry has dipped nearly 2% in the same period.

Further, the company’s estimates have declined considerably in the last 30 days. The Zacks Consensus Estimate for 2017 and 2018 has dipped 6 cents for both periods to 31 cents and 44 cents, respectively.

Avon Products, Inc. Price, Consensus and EPS Surprise


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

Clearly, the stock is in the doldrums due to Avon’s strained earnings and revenues, which continue to be hurt by lack of growth in Active Representatives and currency headwinds. While Active Representatives dipped 3% in the recently reported fourth-quarter 2016, adverse currency fluctuations impacted sales and dragged down adjusted operating margin by 100 basis points and earnings by 2 cents per share. Additionally, the company anticipates results in 2017 to be persistently impacted by currency headwinds.

Is There a Ray of Hope?

While Avon’s surprise history, stock performance and estimates trend suggest a bumpy road ahead, we believe the company’s Transformation Plan could be a silver lining in these dark clouds.

Avon is swiftly progressing on its Transformation Plan that was announced in Jan 2016, which mainly focuses on investing in growth, enhancing cost structure and improving financial flexibility. In 2016, which marked the first of this three-year plan, the company was mainly focused on reducing and aligning cost structure while improving the overall financial resilience. In fact, it surpassed cost saving targets and considerably improved balance sheet during the year.

Looking ahead, for 2017, the company expects to achieve total cost savings of $230 million, on a cumulative basis, including run rate cost savings of $180 million achieved in 2016 and savings for the initiatives planned for 2017.

Bottom Line

We definitely see a ray of hope for Avon’s recovery given the company’s stringent focus and swift progress on its Transformation Plan. However, the company’s failure to boost revenues and earnings indicates that there is something that still remains absent. We would hence prefer to stay away from the stock until the success of its Transformation Plan starts to reflect in top-line and bottom-line results.

Stocks to Consider

Better-ranked stocks in the broader consumer staples sector include Conagra Brands Inc. (CAG - Free Report) , Blue Buffalo Pet Products Inc. and Energizer Holdings Inc. (ENR - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Conagra Brands, with a long-term EPS growth rate of 8%, has witnessed a solid 21.3% growth in the last six months.

Blue Buffalo, with a long-term EPS growth rate of 14%, flaunts a solid earnings history having delivered an average positive surprise of 6.8% in the trailing four quarters.

Energizer has to its credit a spectacular earnings history as it delivered an average positive earnings surprise of 20.5% in the past four quarters. Moreover, its long-term EPS growth rate of 9.5% and positive estimate revisions in the past 60 days help it to stand tall in the industry.

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