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Avon (AVP) Q1 Earnings Beat Estimates, Sales Miss Hurts Stock

Zacks Equity Research

Avon Products Inc’s AVP 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.

A clear reflection of this Zacks Rank #5 (Strong Sell) company’s soft top-line performance was visible in a 1.6% decline in its share price during the pre-market trading.

However, the stock has surged 40% in the past year, outperforming the industry’s growth of 13.9%. This is mainly attributed to the smooth progress on its “Open Up Avon” strategy.

 



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.

Avon Products, Inc. Price, Consensus and EPS Surprise

 

Avon Products, Inc. Price, Consensus and EPS Surprise | Avon Products, Inc. Quote

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% 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.

Count on These Better-Ranked Cosmetics Industry Stocks

The Estee Lauder Companies Inc. EL has an impressive long-term earnings growth rate of 12.9% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Helen of Troy Limited HELE is also a Zacks Rank #2 stock. The company has an expected long-term earnings growth rate of 5.6%.

Inter Parfums, Inc. IPAR also carries a Zacks Rank #2 and has an impressive long-term earnings growth rate of 12.3%.

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