Avon Furthers Cost Saving Plans

Zacks

The distressed global beauty company, Avon Products Inc. (AVP), has moved ahead with its previously announced target of bringing down costs by $400 million through 2015. As the first move in this direction, the company has laid down plans to cut about 1,500 jobs globally and cease operations in the South Korea and Vietnam markets.

Management believes these actions should help streamline operations by improving focus on high priority markets and activities, as well as enhance efficiencies. The company expects these targets to be achieved by the end of 2013.

Avon anticipates the latest turnaround initiatives to incur costs in the $80 – $90 million (before taxes) range, of which about $50 – $60 million would be accounted in the fourth quarter of 2012. These initial cost saving measures are expected to make for about 20% of the total planned savings over the next three years.

In November, Avon outlined some strategic measures focused on accelerating top-line growth, trimming down costs and bettering working capital. Management is in the process of easing business issues and directing the company towards the growth trajectory, bringing back its competitive position among peers like Revlon Inc. (REV).

As part of its strategy, the company, in November, slashed its quarterly dividend by 6 cents per share to 23 cents per share. Management believes this reduction in dividend, coupled with efforts to improve working capital should ease the financial burden on the company.

Of late, Avon has been encountering challenges on various fronts. Last month, Avon posted lower-than-expected sales and earnings results for the third quarter of 2012, marking the sixth consecutive quarter of dismal performance. 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.

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.

Avon currently retains a Zacks #5 Rank that translates into a short-term Strong Sell rating. Moreover, we maintain our long-term Underperform recommendation on the stock, until the endeavors undertaken to regain the lost momentum, show some results.

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