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Avon Stock Surges 58% in a Year: What's Behind the Rally?

Zacks Equity Research

Avon Products, Inc. AVP has been benefiting steadily from its 'Open Up Avon' strategy. This initiative mainly focuses on reviving the company’s direct selling business model, renovating the brand, enhancing e-commerce and other capabilities to aid a performance-driven transformation.

Backed by the afore-mentioned strategy, Avon delivered solid earnings in first-quarter 2019. Quarterly earnings outpaced the Zacks Consensus Estimate and also improved year over year primarily driven by synergies from the “Open Up Avon” strategy and improvement in adjusted operating margin.

Shares of this Zacks Rank #3 (Hold) stock have charted a solid trajectory, surging 58.1% in the past year, outperforming a 12.2% rise of the industry it belongs to. Further, the company’s expected long-term earnings growth rate of 7.5% indicates solid prospects.

Let’s Delve Deep

The 'Open Up Avon' strategy revolves around improving operating efficiency, slashing inventory levels and reducing portfolio complexity by certain restructuring efforts. Restructuring actions will include a 25% decrease in Stock Keeping Units (SKUs), a 15% reduction in inventory levels and nearly 10% job cuts. These jobs cuts are estimated to fetch Avon annualized pre-tax savings of nearly $97 million by 2019 end. All these efforts are likely to help the company simplify operations and generate higher cost savings.

Meanwhile, Avon’s commitment toward attaining its long-term financial targets for 2021 backed by its 'Open Up Avon' strategy is encouraging. It intends to generate total cost-savings of $400 million by expanding manufacturing and distribution, outsourcing efficiencies, zero-based redesigning of back office functions, reducing certain facilities and managing revenues, interest and tax. In addition, management expects to invest roughly $300 million toward commercial, digital & IT infrastructure projects. Investments in the digital & IT infrastructure initiatives also include reinforcing the company’s balance sheet, where its cash-generating abilities must exceed the investment plans. Avon also expects to achieve revenue growth in low-single digits and margin expansion in low double-digits by 2021.

In the fast-growing e-commerce space, Avon is capitalizing on the growth opportunities, making this platform a major growth driver. Furthermore, it remains committed toward improving digital tools and e-commerce channel to boost sales and Representative experience. The company also created dedicated e-commerce business units in all key markets, which helped it to steadily increase the percentage of sales through this channel. Management targets doubling e-commerce sales in 2019.

Furthermore, Avon’s first-quarter results reflected significant gains from improvement in price/mix and average orders. Notably, a favorable price/mix across all segments aided constant-currency revenue growth in three of the company’s four geographical segments. Average orders in constant dollars from the 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.

It is also imperative to mention that adjusted operating margin expanded 50 basis points to 4.5% in the quarter under review, despite a decline in adjusted gross margin. This marked the first adjusted operating margin growth in many years. Moreover, Avon remains on track to attain overall margin expansion in 2019.

Despite these positives, Avon’s dismal sales trend in the last few quarters is concerning. The downside can be attributed to impacts of adverse currency and decline in Representatives across segments. It delivered negative sales surprise in eight of the last 11 quarters, including first-quarter 2019. Currency headwinds are expected to remain strong in second-quarter 2019, which can hurt top line. Additionally, the company’s EMEA segment has been displaying soft trends due to significant challenges in Russia, a declining beauty market with increased competition and weaker sales leader engagement.

Want Better-Ranked Stocks in the Same Space? Count on These

The Estee Lauder Companies Inc. EL delivered positive earnings surprise in each of the trailing four quarters, the average being 14.2%. Also, the company carries 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, which delivered average positive earnings surprise of 15.9% in the last four quarters.

Revlon, Inc. REV has an expected long-term earnings growth rate of 6% and a Zacks Rank #2.

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