It has been about a month since the last earnings report for Avon Products, Inc. (AVP - Free Report) . Shares have lost about 17.7% 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 Posts Q2 Loss & Sales Lag, Cuts FY17 View
Avon Products reported dismal second-quarter 2017 results, wherein both adjusted loss per share and revenues lagged estimates. Results were mainly impacted by strong comparisons with the prior-year quarter.
The company posted adjusted loss from continuing operations of $0.03 per share for the second quarter, lagging the Zacks Consensus Estimate of $0.05. Further, results compared unfavorably with the prior-year earnings per share of $0.07.
On a reported basis, the company posted loss per share of $0.12 compared with earnings of $0.07 in the year-ago quarter.
Total revenue dipped 3% year over year to $1,395.9 million and fell short of the Zacks Consensus Estimate of $1,443.3 million. On a constant currency basis, total revenue declined 4%.
Active Representatives declined 3% compared with the prior-year quarter, while Ending Representatives dipped 2%. Both Active Representatives and Ending Representatives were hurt by decline in all segments, barring Ending Representatives growth in North Latin America. Average orders were down 1% due to decline in Europe, Middle East & Africa (EMEA) and North Latin America, mitigated by growth in South Latin America and flat Asia-Pacific orders. Units Sold dipped 5% due to decline in all segments.
Adjusted gross margin expanded 180 basis points (bps) year over year to 62.4% on the back of favorable price/mix and net positive impact from foreign currency transaction gains and foreign currency translation.
Adjusted operating profit increased 32.9% to $70.1 million, while adjusted operating margin contracted 230 bps to 5%. Operating margin was hampered by constant-dollar revenue decline resulting in deleveraged fixed expenses; higher bad debt expense, particularly in Brazil; increased Representative, sales leader and field expenses; elevated transportation costs, mainly in Russia; and investments in advertising for product launches. This was partly negated by positive impact from currency, improved price/mix and lower incentive compensation plan costs.
Avon’s revenues of $494.6 million in Europe, the Middle East and Africa slipped 5% year over year. On a currency neutral basis, revenues dipped 6%, mainly driven by a 3% fall in both Active Representatives and average orders. Price/mix in the region went up 2%, while units sold declined 8%. Ending Representatives dipped 1%.
Revenues in South Latin America increased 4% year over year to $558.1 million and remained flat in constant-dollars, mainly owing to 2% growth in average orders, partly negated by 2% decline in Active Representatives. Furthermore, price/mix increased 5%, while units sold were down 5%. Ending Representatives also declined 2%.
North Latin America reported a revenues decline of 7% year over year to $207.8 million, and fell 5% in constant-dollars, due to 2% decline in Active Representatives and 3% fall in average orders. Also, price/mix declined 2% while units sold fell 3%. However, Ending Representatives inched up 1%.
The Asia-Pacific division’s revenues fell 11% to $124.7 million and decreased 7% in constant dollars. The decline was mainly attributed to a 7% decline in Active Representatives. While average orders remained flat, units sold fell 3%, price/mix dropped 4% and Ending Representatives declined 7%.
Avon ended the second quarter with cash and cash equivalents of $633.8 million, long-term debt of $1,873.8 million, and shareholders’ deficit of $853.1 million (excluding non-controlling interests).
Transformation Plan Update
Avon is in the second year of its three-year Transformation Plan that was announced in Jan 2016. The plan mainly focuses on investing in growth, enhancing cost structure and improving financial flexibility. Crossing the half-way mark of the plan period, the company has witnessed significant progress against its targets of enhancing cost structure and improving financial resilience.
In 2016, the company surpassed cost saving targets, realizing cost savings of roughly $120 million and considerably improved balance sheet as it reduced debt by about $260 million and extended maturity profile.
In 2017, the company targets cost savings of $230 million, including run-rate savings from 2016, along with in-year savings from current year initiatives. The company stated that savings realized through first-half indicate that it is on track with its goals for 2017. These savings have considerably aided in countering inflation.
With significant progress on two factors, the company is now keen on investing in growth by implementing strategies that will aid in strengthening Avon while driving profitable growth. After deliberate evaluation, the company is now focused on putting in key enablers in place. These enablers include delivering a competitive, seamless experience for Representatives; making sure the Representatives have the right product to sell; and ensuring it is expanding in the right geographies.
With regard to investing in growth, management plans to invest nearly $350 million over the three-year period, 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.
On the back of second-quarter performance, the company now expects constant-dollar revenue growth for 2017 to be at the low-end of its previously provided guidance range of low-single digits growth. This expectation continues to be based on its previously stated Active Representatives growth of 0–1% in second-half 2017, along with solid innovation pipeline and the effects of the ongoing Transformation Plan. Additionally, the company had earlier projected modest currency tailwinds to aid top-line growth.
Further, the company expects the aforementioned top-line growth and its ongoing cost savings initiatives to result in operating margin expansion. Moreover, the company now anticipates free cash flow to increase from its previous guidance of slightly positive free cash flow. This reflects a $20 million reduction capital expenditure from the previously planned $65 million increase.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been three revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 25% due to these changes.
At this time, Avon's stock has a great Growth Score of A, though it is lagging a lot on the momentum front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% 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.
Based on our scores, the stock is equally suitable for value and growth investors.
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.