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Avon (AVP) Earnings Break Even in Q3, Revenues Beat Estimates

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Avon Products Inc. (AVP - Free Report) reported third-quarter 2018 results. The company posted break-even results in the third quarter on an adjusted basis. The Zacks Consensus Estimate was pegged at a cent. On a GAAP basis, the company posted earnings per share of 21 cents compared with a penny in the year-ago quarter.

Q3 in Detail

Total revenues inched up 0.5% year over year to $1,424.2 million. Excluding the Brazil IPI tax release, revenues totaled $1,255.8 million. The Zacks Consensus Estimate for third-quarter revenues stands at $1,323 million.

Total Reportable Segment revenues (in reported currency) also grew 1% to $1,415.8 million. On a like-for-like basis, which excludes the impact of the adoption of the new revenue standard in the first quarter of 2018, total Reportable Segment revenues (in constant currency) fell 4% in the quarter.

Active and Ending Representatives fell 5% and 6%, respectively. Meanwhile, average orders improved 4% and price/mix rose 5%, while total units sold dropped 6%.

Adjusted gross margin contracted 410 basis points (bps) year over year to 57.1% due to higher supply-chain costs, partly negated by positive impact from price/mix. Further, gross margin included a 420 bps negative impact from the adoption of the new revenue standard. On a like-for-like basis, gross margin expanded 10 bps to 61.3% in the quarter under review.

Adjusted operating margin fell 360 bps to 3%, attributable to unfavorable year-over-year comparisons from investments in Representative, sales leader and field expenses largely due to the national transportation strike in Brazil in the previous quarter. Also, increased advertising and net brochure expenses, mainly in Brazil, owing to higher brochure volumes hurt margin. Further, operating margin included 80 bps negative impact from the adoption of the new revenue standard. On a like-for-like basis, the metric came in at 3.8% in the quarter.

Segmental Performance

Avon’s revenues of $442.9 million in Europe, Middle East & Africa fell 8% year over year. On a currency-neutral basis, revenues were down 3%. Results included a 4% decline in Active Representatives and a 7% fall in units sold. Also, Ending Representatives fell 5%. These were offset by a 2% gain from the new revenue standard. Further, price/mix and average order rose 1% and 4%, respectively.

Revenues in South Latin America fell 19% to $477 million and remained flat on a constant-dollar basis. During the reported quarter, Active and Ending Representatives declined 7% each, while units sold fell 10%. This also included a 5% gain from the new revenue standard. However, the segment witnessed a 7% increase in average order and a 10% rise in price/mix. Further, reported revenues rose 9%, mainly driven by the Brazil IPI tax reversal.

North Latin America’s revenues were flat year over year at $207 million and improved 5% in constant dollars, attributable to an 8% increase in average orders, 4% growth in units sold and 1% rise in price/mix. This was partly offset by a 3% fall in Active Representatives and a 9% decline in Ending Representatives. Revenues for the segment included a 3% gain from the new revenue standard.

Revenues at Asia Pacific edged up 2% to $120.5 million and improved 6% in constant dollars, mainly owing to an 8% increase in average orders and a 6% rise in units sold. This was partly negated by a 2% fall in both Active Representatives and Ending Representatives. However, price/mix remained unchanged. Revenues included a 2% benefit from the adoption of the new revenue standard.

Financial Details

Avon ended the quarter with cash and cash equivalents of $374.3 million, long-term debt of $1,630.8 million and total shareholders’ deficit of $802.9 million (excluding non-controlling interests).

During the third quarter, the company achieved run-rate savings of $350 million. Notably, these restructuring initiatives related to the cost savings program began in 2016. Avon also initiated its "Open Up Avon" strategy and is focused on latest cost-savings initiatives, announced in September 2018. This latest strategy mainly focuses on reviving its direct selling business, renovating the brand, enhancing e-commerce and other capabilities to aid a performance-driven transformation.



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