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Avon (AVP) Up 35.1% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Avon Products (AVP - Free Report) . Shares have added about 35.1% 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 Q1 Earnings Beat Estimates, Sales Miss

Avon’s earnings beat estimates and improved year over year in first-quarter 2019, driven by improvement in adjusted operating margin and continued progress on the “Open Up Avon” strategy. However, the top line missed estimates and declined year over year mainly due to impacts of adverse currency and soft Representatives growth across segments. We note that Active and Ending Representatives declined 9% and 10%, respectively, which impacted the top line.

Avon’s adjusted earnings of 3 cents per share surpassed the Zacks Consensus Estimate of loss of a penny. In the year-ago quarter, it recorded loss per share of 2 cents. On a GAAP basis, the company incurred loss of 9 cents per share compared with loss of 6 cents registered in the year-ago quarter. Notably, currency headwinds hurt adjusted earnings per share by 3 cents.

Q1 in Detail

Total revenues declined 14.8% year over year to $1,186.9 million and missed the Zacks Consensus Estimate of $1,252 million. In constant dollars, total revenues dipped 4%. Further, total Reportable Segment revenues (in reported currency) declined 14% to $1,181.4 million mostly due to adverse currency movements. In constant currency, total Reportable Segment revenues dropped 3% even as price/mix gains led to revenue growth in three of its four geographical segments.

Average orders in constant dollars from Reportable Segments were up 6% and price/mix rose 8%, both driven by increases in all reportable segments. The improved price/mix and average orders were results of the company’s constant focus on revenue growth management, including lesser discounts and more targeted and effective incentives, with little promotions.

Adjusted gross margin contracted 160 basis points (bps) to 56.1%, driven by adverse impact of currency headwinds, offset by positive effect of favorable price/mix.

While operating margin on a GAAP basis contracted 350 bps, adjusted operating margin expanded 50 bps to 4.5%. This increase was mainly driven by the execution of the company’s cost-saving initiatives despite a decline in adjusted gross margin.

Segmental Performance

Avon’s Europe, Middle East & Africa segment generated revenues of $458.7 million, which fell 19% year over year. On a currency-neutral basis, revenues were down 9%. Results included 12% decline each in Active and Ending Representatives, and a 15% fall in units sold. These were offset by 6% gain in price/mix and 3% growth in average order.

South Latin America’s revenues declined 17% to $414.7 million while it rose 1% on a constant-dollar basis. In the reported quarter, Active Representatives declined 6% while Ending  Representatives dipped 7%. Units sold declined 11%. However, the segment witnessed a 7% increase in average order and 12% rise in price/mix.

North Latin America’s revenues dipped 1% year over year to $192.7 million but improved 1% in constant dollars. While Active Representatives were down 8% year over year, Ending Representatives declined 12% and units sold fell 3%. However, the segment reported 9% increase in average orders and 4% growth in price/mix.

Asia Pacific’s revenues increased 3% to $115.3 million while it improved 7% in constant dollars, mainly owing to 19% increase in average orders and 8% rise in price/mix. This was partly negated by a 12% decrease in Active Representatives and 6% decline in Ending Representatives along with 1% fall in units sold.

Financial Details

Avon ended the quarter with cash and cash equivalents of $406.4 million, long-term debt of $1,196.4 million, and total shareholders’ deficit of $948.6 million (excluding non-controlling interests).

Other Developments

In April 2019, Avon agreed to sell 19.9% ownership interest in New Avon to LG Household & Health Care Ltd. New Avon is a privately-held company that is majorly owned and managed by an affiliate of Cerberus. LG Household & Health Care agreed to pay $125 million for the purchase, with Avon receiving about $24.9 million for its 19.9% stake. The transaction is likely to close on Sep 30, 2019.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted 50% due to these changes.

VGM Scores

At this time, Avon has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

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

Outlook

Avon has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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