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Avon (AVP) Stock Down on Q4 Earnings and Revenues Miss

Zacks Equity Research

Avon Products Inc. AVP reported dismal fourth-quarter 2018 results, wherein earnings and revenues missed the Zacks Consensus Estimate. Also, both the metrics declined year over year. We note that Active and Ending Representatives fell 6% and 8%, respectively, which mainly impacted the top line. A clear reflection of this Zacks Rank #4 (Sell) company’s dismal performance is visible in its share price decline of 7.4% during the pre-market trading.

The company’s earnings came in at 7 cents per share, which fell short of the Zacks Consensus Estimate by a penny and also declined 41.7% year over year. On a GAAP basis, the company incurred a loss of 19 cents per share compared to earnings of 17 cents registered in the year-ago quarter.

Avon Products, Inc. Price, Consensus and EPS Surprise

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

Q4 in Detail

Total revenues fell 11% year over year to $1,401.7 million. Net sales declined 14% to $1,323 million. The Zacks Consensus Estimate for fourth-quarter revenues stands at $1,443 million.

Further, total Reportable Segment revenues (in reported currency) also declined 10% to $1,395.3 million. On a like-for-like basis, which excludes the impact of the adoption of the new revenue standard in first-quarter 2018, total Reportable Segment revenues (in constant currency) fell 1% in the quarter. While average orders improved 7% and price/mix rose 9%, total units sold dropped 8%.

Adjusted gross margin came in at 56.1% in the quarter. Further, on a like-for-like basis, gross margin contracted 140 basis points (bps) to 59.7%, mainly due to adverse impact from foreign exchange.

Meanwhile, adjusted operating margin was 5.5%. On a like-for-like basis, operating margin fell 420 bps to 5.7% on gross margin contraction as well as investments in Representative, sales leader and field expenses. Also, increased advertising and transportation costs along with sales deleverage and adverse foreign currency dented margins. These were somewhat mitigated with lower bad debt, mainly in Brazil.

Segmental Performance

Avon’s Europe, Middle East & Africa segment generated revenues of $581.8 million, which fell 9% year over year. On a currency-neutral basis, revenues were down 2%. Results included an 8% decline in Active Representatives and a 9% fall in units sold. Also, Ending Representatives fell 10%. These were offset by a 7% gain in price/mix and 6% growth in average order.

South Latin America’s revenues fell 15% to $488.3 million, while the same rose 6% on a constant-dollar basis. In the reported quarter, Active and Ending Representatives declined a respective 7% and 9%, while units sold fell 10%. However, the segment witnessed a 13% increase in average order and a 16% rise in price/mix.

North Latin America’s revenues dipped 3% year over year at $199.4 million but improved 3% in constant dollars. While Active Representatives remained flat year over year, Ending Representatives declined 7%. Further, the segment reported a 2% increase in average orders and 1% growth in both units sold and price/mix.

Asia Pacific’s revenues remained flat at $125.8 million, while it improved 4% in constant dollars, mainly owing to a 6% increase in average orders and a 4% rise in units sold. This was partly negated by a 2% fall in Active Representatives and a 3% decline in Ending Representatives. Meanwhile, price/mix remained unchanged.

Financial Details

Avon ended the year with cash and cash equivalents of $532.7 million, long-term debt of $1,581.6 million and total shareholders’ deficit of $904.5 million (excluding non-controlling interests).

Other Developments

Avon has successfully completed its restructuring plans pertaining to the cost savings program that was initiated in 2016. Notably, the company surpassed the targeted $350 million run-rate savings in 2018. Additionally, it generated $40 million of cost savings from its ‘Open Up Avon’ strategy.

Furthermore, Avon has been taking strategic measures to create a simpler and more agile company. Evidently, management has announced the sale of China manufacturing facility as well as manufacturing and supply agreements with LG. Moreover, the company plans to improve operating efficiency, slash inventory levels and reduce portfolio complexity. These restructuring efforts include a 25% decrease in Stock Keeping Units (SKU), a 15% reduction in inventory levels and 10% job cuts.

The company also recorded one-time inventory obsolescence expenses of nearly $88 million in the reported quarter and plans to incur a restructuring charge of roughly $100 million in 2019. In the fourth quarter, it repaid an additional $50 million of debt, following which its total debt reduced to about $300 million at the end of the year. The company notified that it has entered into a new three-year, €200 million senior secured credit facility.

You May Count on These Better-Ranked Consumer Staples Stocks

The Estee Lauder Companies Inc. EL has an impressive long-term earnings growth rate of 12.4% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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The Simply Good Foods Company SMPL carries a Zacks Rank #2 (Buy) and has delivered average positive earnings surprise of 13.3% in the trailing four quarters.

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