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Avon Still in Red, Earnings Slump

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Avon Products Inc. (AVP - Free Report) continued to disappoint for the sixth straight quarter, posting poorer-than-expected sales and earnings results for the third quarter of 2012. The company’s adjusted earnings per share dipped 55.2% year over year to 17 cents and also fell short of the Zacks Consensus Estimate of 23 cents per share.  

On a reported basis, earnings plummeted 81.6% to 7 cents per share compared with 38 cents recorded in the year-ago quarter.

Total revenue declined 7.7% year over year to $2,550.9 million compared with $2,762.4 million a year ago. Moreover, total revenue missed the Zacks Consensus Estimate of $2,591 million. Flat price/mix as well as a meager 1% increase in total units mainly contributed to the decline in top line. Adding to the mess, the company’s active representatives registered a 1% decline.

Avon registered a revenue decline in its Beauty Products and Fashion categories, where sales decreased 9% and 2%, respectively. The decline in Beauty revenue was driven by short falls in its color, skincare, fragrance and personal care products. The company’s Home products category posted revenue of $245.3 million.

Avon’s adjusted gross margin fell 280 basis points year over year to 61.2%, on account of the negative impact of product mix and pricing, higher supply chain costs as well as unfavorable foreign exchange. Adjusted operating profit dwindled 46.5%, while operating margin contracted 440 basis points to 5.9%, attributable to lower gross margin along with higher overhead costs.

Region-wise Performance

Avon delivered 6% revenue decline in Latin America, primarily due to a 19% decline in Brazil, partially offset by a 1% and 6% rise in Mexico and Venezuela. Units sold were up 5% during the quarter, while Active representatives showed an augmentation of 2% year over year.

In North America, sales skidded 8% year over year. The North American Business, excluding Silpada, was down 6% on account of decline in Active Representatives. At Silpada, sales were down 25% as average orders as well as Active Representatives declined. Units sold for the region waned 10% year over year, while Active Representatives slipped 12%.

The beauty product manufacturer’s revenues in Europe, Middle East and Africa fell 11% year over year, primarily due to lower average orders, offset by an increase in Active Representatives. Regional breakup shows that sales were down in every operating region with Russia and Turkey down 9%, U. K. down 25%, and South Africa down 14%. Avon registered a 5% increase in Active Representatives, while units sold were up by 2% during the quarter.

The Asia-Pacific division witnessed an 8% dip in revenues. The region marked a 12% decline in Active representatives and a 7% fall in units sold. Country-wise, the region recorded a 6% revenue increase in Philippines, largely offset by a 31% decline in China.

Other Financial Details

The leading global beauty company exited the quarter with cash and cash equivalents of $1,097.5 million, long-term debt (excluding current maturities) of $2,628.3 million, and shareholders’ equity of $1,466.6 million.

During the nine-month period ended September 30, 2012, the company earned net cash of $219.6 million for operational activities as against $247.2 million in the prior-year comparable period. Avon expended $134.9 million in capital expenditure during the period.

Future Outlook

Keeping in view the challenges the company is encountering, management has now outlined some strategic measures that are focused on accelerating top-line growth, trimming down costs and bettering working capital. Management is continually looking to ease business issues and direct the company towards the growth trajectory, bringing back its competitive position among peers like Revlon Inc. (REV - Free Report) .

In a drive to attain this stature, management has set a mid single-digit constant-dollar revenue growth and a low double-digit operating margin target over the next three years. Further, the company targets to save costs by at least $400 million by the end of these three years by cutting down on its Selling, General and Administrative (SG&A) expenses.

Moreover, earlier this morning, the company cut its quarterly dividend by 6 cents per share to 23 cents per share, in accordance with its previous announcement of re-evaluating its capital structure. Management believes this reduction in dividend together with efforts to improve working capital should ease the financial pressures on the company.

Avon currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Our long-term recommendation on the stock is Underperform.

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