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Can Avon (AVP) Turn Around its Dismal Earnings Trend in Q4?

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Avon Products, Inc. (AVP - Free Report) is slated to release fourth-quarter 2017 results on Feb 15, before the market opens. The question lingering in investors’ minds is whether this leading beauty and cosmetics retailer will be able to reverse its negative earnings surprise trend in the quarter to be reported.

Notably, the company has been exhibiting a dismal earnings trend for the past five quarters. Consequently, it has delivered a negative earnings surprise of 98.7% in the trailing four quarters. Though sales outpaced estimates in third-quarter 2017, it had lagged in the preceding four quarters. Let’s find out how things are shaping up for this announcement.

Which Way are Estimates Treading?

In order to get a clear picture of what analysts are thinking about the company prior to earnings release, let’s have a look at the earnings estimate revisions. The Zacks Consensus Estimate for the quarter under review has been stable over the past 30 days and is currently pegged at 6 cents. This marks a significant upside from 1 cent reported in the year-ago quarter. Analysts polled by Zacks expect revenues of $1.6 billion, up 1.5% from the prior-year quarter.

Avon Products, Inc. Price, Consensus and EPS Surprise

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

Factors at Play

Avon’s troubles are not very new though. Dismal earnings trend and fall in Active Representatives have been major concerns for Avon for quite sometime. We note that Active Representatives have been consistently recording a decline of 3% for the trailing four quarters. The fall in Active Representatives is due to decline in all segments. Further, the company’s strained margins and high bad debt expenses indicate that the troubles for this beauty products company are far from over.

Avon has been witnessing strained margins over the past few quarters. Notably, the company’s operating margin contracted 70 basis points (bps), 230 bps and 130 bps in the third, second and first quarters of 2017, respectively. The decline in operating margin mainly stemmed from higher bad debt expenses, particularly in Brazil. Additionally, increased Representative, sales leader and field expenses have been hurting margin growth in the last two quarters.

While Avon expects modest growth in fourth-quarter 2017 backed by favorable trends in various markets, it projects results to fall short of expectations in 2017. The company now anticipates both constant-dollar revenues and adjusted operating margin in the band of flat to slightly up compared with the prior-year period.

Nevertheless, Avon’s progress on Transformation Plan is on track to deliver cost savings goals of $230 million for 2017. Further, the company expects to drive growth through innovations, solid team execution, improving Representative experience. However, the company will take time to realize the benefits from these strategies.

Despite all odds, the company’s shares have improved 14.9% in the last three months, outperforming the industry’s growth of 8.3%. This indicates that there still remains hope for revival.

What the Zacks Model Unveils?

Our proven model does not conclusively show that Avon is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Avon currently has a positive Earnings ESP of +12.90%. However, it carries a Zacks Rank #4 (Sell). The combination of Avon’s Zacks Rank #4 and Earnings ESP of 12.90% makes surprise prediction difficult.

Stocks With Favorable Combination

Here are some other companies you may want to consider as our model shows that these too have the right combination of elements to post an earnings beat:

Dillard’s Inc. (DDS - Free Report) has an Earnings ESP of +4.25% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Aaron’s Inc. (AAN - Free Report) has an Earnings ESP of +3.81% and a Zacks Rank #2.

Macy’s Inc. (M - Free Report) has an Earnings ESP of +0.92% and a Zacks Rank #2.

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