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Will Avon's (AVP) Strategies Help Find a Way Out of the Maze?

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Beauty products retailer, Avon Products Inc. (AVP - Free Report) seems to be trapped in a maze with nowhere to go. The company has long been struggling with dismal top-line and bottom-line performances due to weak Active Representatives growth and negative currency movements. Evidently, the company’s top-line and bottom-line has lagged the Zacks Consensus Estimate for three consecutive quarters now. Further, the company delivered loss per share in the preceding two quarters.

This dismal trend has also largely weighed down the company’s stock price. The stock has lost nearly 4% in the last one month. Further, shares of this Zacks Rank #5 (Strong Sell) company have declined 30.9% year to date, while the Zacks categorized Cosmetics industry has gained nearly 2.1%.

What’s Behind the Decline?

Clearly, the stock is struggling due to strained earnings and revenues, as discussed above. In the recently reported first-quarter 2017, Avon’s adjusted loss from continuing operations of 7 cents per share, compared unfavorably with our break-even estimate. Results were impacted by loss of North American business (which was separated in Mar 2016), fall in Active Representatives (especially in Russia and Malaysia), a rise in bad debt expenses (particularly in Brazil) and greater transportation expenses (mainly in Russia). Most of these factors also weighed upon the adjusted operating margin that contracted 130 basis points.

Additionally, management stated that the company is facing macroeconomic headwinds like mounting competition in several markets, along with geopolitical and economic volatility. Further, it anticipates the increase in bad debts (in Brazil) to linger in the second quarter, which is expected to remain challenging. All these factors pose concerns about Avon’s future performance, which in turn resulted in a downtrend in the Zacks Consensus Estimate for the second quarter as well as 2017 in the last 60 days. Estimates for these periods have fallen by 3 cents and 6 cents, respectively, to 6 cents and 22 cents.

Can the Tables Turn?

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

Avon is swiftly progressing on its three-year Transformation Plan that was announced in Jan 2016, which mainly focuses on investing in growth, enhancing cost structure and improving financial flexibility. The company is on track to generate targeted savings of $230 million in 2017. Moreover, it is confident of achieving long-term goals of low-double digit operating margin growth, Active Representatives growth of 1–2% and constant-dollar revenue growth in the mid-single digits.

Bottom Line

The stringent focus and swift progress on the Transformation Plan could be rewarding for the company. However, the dismal revenues and earnings indicate that more efforts need to be put in. 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 Compania Cervecerias Unidas S.A. (CCU - Free Report) , Craft Brew Alliance Inc. (BREW - Free Report) and Coca-Cola FEMSA S.A.B. de C.V. (KOF - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Compania Cervecerias Unidas has jumped nearly 27.1% year to date. Also, the company’s estimates for the current fiscal have witnessed uptrend in the last 30 days.

Craft Brew Alliance has gained nearly 17.5% in the last three months. Also, the company’s estimates for the current fiscal have witnessed positive estimate revisions in the last 30 days.

Coca-Cola FEMSA has surged 33.5% year to date. Moreover, it has a long-term earnings growth rate of 17%.

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