Avon Products Inc. (AVP - Free Report) reported positive earnings surprise in fourth-quarter 2017, following five straight quarters of negative surprise. However, revenues returned to negative surprise trend after a beat in the preceding quarter. Nevertheless, the company remains on track with its Transformation Plan, delivering above its cost-saving plan for 2017.
Shares of Avon improved 9.2% in the pre-market trading session, following the fourth-quarter earnings. Overall, the company’s shares have surged 19.5% in the last three months, outperforming the industry’s growth of 10.9%.
Avon posted adjusted earnings from continuing operations of 12 cents per share in the fourth quarter, beating the Zacks Consensus Estimate of 6 cents. Additionally, it reflected a significant improvement from the earnings of 1 cent per share in the prior-year quarter. Bottom line gained from considerable margin gains from lower bad-debt expenses and benefits from cost reduction initiatives, alongside tax gains from the recently enacted tax reform.
On a reported basis, the company posted earnings per share of 17 cents against the loss per share of 3 cents in the year-ago quarter.
Total revenues remained flat year over year at $1,568.8 million but lagged the Zacks Consensus Estimate of $1,592 million. On a constant currency basis, total revenues declined 2%, mainly due to the declination of Active Representatives, particularly in Brazil.
While Active Representatives declined 2% compared with the prior-year quarter, Ending Representatives remained flat. Moreover, average orders came in flat, with both total units sold and price/mix dropping 1% each.
Adjusted gross margin expanded 80 basis points (bps) year over year to 61.1%, mainly on the back of a positive impact from price/mix.
Adjusted operating margin expanded 250 bps to 9.8%. The year-over-year increase was due to lower bad-debt expenses, particularly in Brazil; as well as lower fixed–costs, primarily related to the gains from cost reductions under the Transformation Plan. These factors were partly negated by higher Representative, sales leader and field expense to drive Representative activity.
Avon’s revenues of $641.6 million in Europe, Middle East & Africa rose 3% year over year. On a currency-neutral basis, revenues dipped 2%, mainly owing to 3% drop in average orders, offset by 1% increase in Active Representatives. The decline also stemmed from the fall in constant-dollar revenues in Russia and the U.K., offset by gains in Turkey with mixed results in rest of the segment. While price/mix in the region dipped 2%, units sold remained flat. Ending Representatives rose 3%.
Revenues in South Latin America decreased 2% year over year to $575.4 million and were down 1% in constant-dollars, mainly owing to 4% decline in Active Representatives, offset by 3% growth in average orders. Revenue was also impacted by the fall in Brazil, partly negated by growth in Argentina. Price/mix dipped 1% and Ending Representatives fell 3%, while units sold were flat.
North Latin America’s revenues were flat at $204.8 million and declined 2% in constant-dollars, attributable to 3% fall in Active Representatives including the impact of the September 2017 earthquake in Mexico, offset by 1% increase in average orders. While price/mix grew 2%, units-sold fell 4%. Moreover, Ending Representatives declined 2%.
The Asia-Pacific division’s revenues declined 3% to $139.3 million and down 2% in constant dollars, mainly owing to 1% decline in both Active Representatives and average orders. Additionally, price/mix, units sold and Ending Representatives dropped 1% each. During the quarter, constant-dollar revenue growth in the Philippines was offset by declines in most other markets in the segment.
Avon ended 2017 with cash and cash equivalents of $881.5 million, long-term debt of $1,872.2 million and total shareholders’ deficit of $714.7 million (excluding non-controlling interests).
Transformation Plan Update
Avon has completed the second year of its three-year Transformation Plan that was announced in January 2016. The plan mainly focuses on investing for growth, enhancing cost structure and improving financial flexibility. The company has witnessed significant progress, compared with its targets of enhancing cost structure and improving financial resilience.
In 2017, the company surpassed the cost-saving target of $230 million for the year, realizing cost savings of more than $250 million. Cost savings for the year include both run-rate savings from 2016 and in-year savings from current year initiatives. These savings were mostly offset by the impact of inflation.
Going forward, management is likely to focus on the business foundations and improve overall performance to attain its savings target. Though Avon is facing challenges, it is expected to focus on investment in modernizing systems, delivering unique and competitive Representative experience. Further, it aims to provide deeper insights and analytics into Representative’s behavior and requirements to boost experience.
In fact, the company also remains encouraged to minimize service disruption along with pilot programs that cover service from end to end.
The company expects to achieve the long-term target of delivering the mid-single-digit constant-dollar revenue growth and low double-digit operating margin. However, the company believes that this will take time. Going forward, the company expects 2018 to be a year of executing significant operational improvements, despite continued competitive pressures.
Zacks Rank & Stocks to Consider
Avon carries a Zacks Rank #4 (Sell). Better-ranked stocks in the same industry include The Estee Lauder Companies Inc. (EL - Free Report) , Helen of Troy Limited (HELE - Free Report) and Nu Skin Enterprises Inc. (NUS - 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.
Estee Lauder, with a long-term earnings growth rate of 12.9%, has pulled off an average positive earnings surprise of 18.1% in the trailing four quarters.
Inter Parfums, with a long-term earnings growth rate of 2.3%, has delivered an average positive earnings surprise of nearly 17% in the trailing four quarters.
Nu Skin, with a long-term earnings growth rate of 8.8%, has delivered an average positive earnings surprise of 3.2% in the past four quarters.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>