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Why Is Avon (AVP) Up 12.8% Since Last Earnings Report?

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It has been about a month since the last earnings report for Avon Products (AVP - Free Report) . Shares have added about 12.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Avon due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Avon Earnings Break Even in Q3, Revenues Beat Estimates

Avon Products reported third-quarter 2018 results, wherein the company posted break-even results 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 a total cost savings of roughly $40 million before taxes and remains on track to achieve its targeted run-rate savings of $350 million in 2018. 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.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -26.19% due to these changes.

VGM Scores

At this time, Avon has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Avon has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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