Avon Products, Inc. (AVP - Free Report) is progressing quite well with its Transformation Plan, which is focused on enhancing cost structure and improving financial flexibility. Furthermore, the company’s new ‘Open Up Avon’ strategy, aimed at bringing it back on the growth trajectory, bodes well. Meanwhile, management remains focused on reigniting and re-energizing its Representative experience, which is a key factor behind the success of its direct-selling business.
Shares of this cosmetics leader have lost 8.9% year to date, wider than the industry’s 3.3% decline. This underperformance can be attributed to Avon’s dismal surprise trend mostly attributed to soft Representative growth. Notably, the company lagged the earnings estimates in four of the trailing six quarters with a negative sales surprise in six of the last nine quarters.
Avon posted break-even results in third-quarter 2018. Though the company delivered impressive top-line performance, it witnessed sharp margin contractions in the quarter. Active and Ending Representatives fell 5% and 6%, respectively. Adjusted gross margin contracted 410 basis points (bps) due to higher supply-chain costs and a negative impact from the adoption of the new revenue standard.
Moreover, adjusted operating margin fell 280 bps due to higher investments in Representative, sales leader and field expenses largely due to the national transportation strike in Brazil in the previous quarter. Moreover, increased advertising and net brochure expenses, mainly in Brazil, on higher brochure volumes negatively impacted margins.
So let’s analyze whether the company’s growth initiatives can help reverse the stock’s downtrend.
Avon is in the third year of its three-year Transformation Plan that was announced in January 2016. The company has witnessed significant progress with respect to this plan and remains on track to accomplish its targeted run-rate savings of $350 million in 2018. Last year, Avon surpassed the cost-savings target of $230 million, realizing cost savings of more than $250 million.
Additionally, the company’s recently announced ‘Open Up Avon’ strategy focuses on reviving its direct selling business, renovating the brand, enhancing e-commerce and other capabilities to aid a performance-driven transformation. Buoyed by this strategy, Avon remains committed to attain its long-term financial and cost savings targets for 2021.
By 2021, the company intends to generate total cost-savings of $400 million on the back of expanding manufacturing and distribution capabilities, outsourcing efficiencies, zero-based redesigning of back office functions, reducing certain facilities and managing revenue, interest and tax. Management expects to invest roughly $300 million toward commercial, digital & IT infrastructure projects. Investments in the digital & IT infrastructure initiatives also include reinforcing the company’s balance sheet, where its cash-generating abilities must exceed the investment plans. Management also targets achieving revenue growth in low-single digits and margin expansion of low-double digits.
Alongside, Avon has made significant improvements in servicing its Representatives by improving delivery and service at its distribution centers. Further, it has adopted a new segmented approach to differentiate between its Representatives and rewarding them accordingly. These Representatives have different needs and motivations, and require different tools, training and support as well as compensations. Moreover, the company has started imparting training for its Representatives by setting up a new global academy to deliver training in each country. These actions raise hopes about the recovery of Avon’s direct-selling business by boosting Representative growth.
Moving ahead, we expect these strategies to drive growth across Avon’s business and boost its share performance. Currently, Avon carries a Zacks Rank #3 (Hold).
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Helen of Troy Limited (HELE - Free Report) is also a Zacks Ranked #2 stock, which has outpaced the earnings estimates in each of the last four quarters by an average of 21.2%.
Archer Daniels Midland Company (ADM - Free Report) delivered an average positive earnings surprise of 26.9% in the trailing four quarters. The company carries a Zacks Rank of 2.
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