Avon Continues to Underperform

Zacks

We maintain our long-term ‘Underperform’ recommendation on Avon Products Inc. (AVP), the New York-based cosmetics giant, mainly due to its disappointing second-quarter 2012 results. The poor showing primarily reflects sluggish performances by the company at each and every region where it operates, along with increased input costs and operating expenses.

Weak sales and higher input and operating costs continued to weigh upon the bottom-line performance of Avon. The company’s earnings of 20 cents per share for the quarter plummeted 59% from the year-ago quarter’s level, in the process missing the Zacks Consensus Estimate by a penny.

Further, the company’s net sales declined 9% year over year to $2,591.7 million, again missing the Zacks Consensus Estimate of $2,685 million. The decline in sales was mainly attributable to a fall of 4% in total units, partially offset by a benefit of 3% from favorable price mix.

We believe Avon’s shift of focus from representative growth, technological up gradation and lack of attention towards commercial sales and unfavorable product mix were the reasons behind its stalled performance. As a result, Avon reported decline in its revenue in every region it operates.

Going forward, we believe that Avon’s initiatives to change the product and price mix will require significant advertising and promotional expenditures, which may weigh upon its margins. Moreover, the sluggish discretionary spending, along with intense competition and exposure to foreign currency may undermine the company’s future prospects.

Avon’s financial performance may be substantially affected due to its significant presence in international market (81% of total revenue in fiscal 2011), which exposes it to unfavorable foreign currency translations, economic or political instability and other governmental actions on trade and repatriation of foreign profits.

Based on the above analysis, we anticipate Avon Products to perform below its peers in the coming months. Therefore, we see little reasons for the investors to own this stock.

Avon, which competes with Revlon Inc. (REV), carries a Zacks #4 Rank, implying short-term Sell rating for the next 1-3 months.

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