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Avon (AVP) Makes a Comeback with Q2 Earnings & Sales Beat

Zacks Equity Research

Avon Products Inc. AVP made a comeback in second-quarter 2016 with better-than-expected top- and bottom-line results that were backed by improved performances in 9 of the company’s top 10 markets in local currency. Further, we believe the company’s efforts towards improving pricing, lowering costs, building brand strength and boosting Active Representatives are starting to pay-off. This marked the company’s first earnings beat after missing estimates for three consecutive quarters.

The company reported adjusted earnings from continuing operations of 7 cents per share for the second quarter, surpassing the Zacks Consensus Estimate of 3 cents while plunging 22.2% from 9 cents reported in the year-ago quarter.

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Avon Products Inc. (AVP) Street Actual & Estimate EPS - Last 5 Quarters | FindTheCompany

Further, on a reported basis also, the company posted earnings of 7 cents per share compared with 6 cents earned in the year-ago quarter.

Deeper Insight

Total revenue fell 8% year over year to $1,434.3 million but was ahead of the Zacks Consensus Estimate of $1,411 million. On a constant currency basis, total revenue improved 5%, net of the impact of Liz Earle’s divestiture that took place in Jul 2015. Including the same, constant-currency total revenue rose 4%.

Active Representatives inched up 1% year over year as improvement in Europe, Middle East & Africa and North Latin America, were nullified by decreases in the Asia Pacific region. Average orders were up 4% due to an increase in all reportable segments stemming from better prices. Additionally, Ending Representatives jumped 2% backed by growth in Europe, Middle East & Africa and South Latin America, offset by fall in Asia Pacific.

Adjusted gross margin contracted 70 basis points (bps) year over year to 60.6%, mainly due to negative currency effects, partly negated by improved pricing efforts, better mix and lower supply chain expenses.

Adjusted operating margin expanded 100 bps to 7.3% in the quarter gaining from the improved price/mix and synergies from cost-saving initiatives, offset by adverse currency movements.

Segment Performance

Avon’s revenues of $520.9 million in Europe, the Middle East and Africa declined 2% year over year. However, on a currency neutral basis, revenues rose 7%, mainly driven by a 4% increase in Active Representatives and a 3% rise in average orders. Growth in Active Representatives was mainly backed by strength in Russia, while average orders increased in both Russia and U.K. Price/mix in the region went up 5%, while units sold rose 2%. Ending Representatives grew 6%.

Revenues in South Latin America dipped 12% year over year to $535.7 million but rose 5% in constant-dollars, mainly backed by 5% growth in average order. However, constant dollar revenues bore a 2 points impact from MVA taxes in Brazil, along with a 1 point impact from the levy of Industrial Production Tax (IPI) in Brazil, offset by Argentina’s 3 points contribution to constant dollar growth. Units sold were down 2%, Active Representatives were flat, and Ending Representatives were up 1%, while price/mix rose 7%.

North Latin America reported revenue decline of 5% year over year to $224.4 million, while the same increased 6%, on a constant-dollar basis, benefiting from a 4% rise in Active Representatives and 2% growth in average orders. Also, price/mix escalated 12% while Ending Representatives were flat and units sold fell 6%.

The Asia-Pacific division’s revenues fell 10% to $141.9 million and decreased 5% in constant dollars. The decline was due to lower revenues in most markets, except Philippines. Also, an 8% fall in Active Representatives contributed largely to the decline, partly offset by 3% growth in average order. During the quarter, both Ending Representatives and units sold fell 4% each, while price/mix slipped 1%.

Financial Details

Avon exited the quarter with cash and cash equivalents of $741.5 million, long-term debt of $2,139.6 million, and shareholders’ deficit of $830.9 million.

AVON PRODS INC Price, Consensus and EPS Surprise

AVON PRODS INC Price, Consensus and EPS Surprise | AVON PRODS INC Quote

Zacks Rank

Avon currently carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the same industry are Inter Parfums Inc. IPAR with a Zacks Rank #1 (Strong Buy), Nu Skin Enterprises Inc. NUS and Helen of Troy Limited HELE, each holding a Zacks Rank #2 (Buy).

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