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Factors Likely to Decide Avon's (AVP) Fate in Q1 Earnings

Zacks Equity Research

Avon Products, Inc. AVP is slated to release first-quarter 2019 results on May 2. The company has a dismal earnings surprise trend, having lagged estimates in 11 of the last 14 quarters. Further, it witnessed average negative earnings surprise of 128.1% in the trailing four quarters.

Avon Products, Inc. Price and EPS Surprise

 

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

The Zacks Consensus Estimate for first-quarter is pegged at a loss of a cent, indicating an improvement from a loss of 2 cents reported in the prior-year quarter. Notably, estimates remained stable over the past 30 days. For revenues, the consensus mark stands at $1.25 billion, implying a decrease of roughly 10.2% from the prior-year quarter’s reported figure.

Let’s see how things are shaping up for this announcement.

Factors Impacting the Stock

Avon, which is in talks with Natura for a potential sale, is grappling with soft Representatives growth for quite some time now. This is a major concern for the company, as providing more incentives to the representatives to motivate them is denting its margins. The company is focused on the boosting Representatives' morale via training efforts and increased promotions. Persistence of soft Representatives might dent top and bottom lines in the first quarter of 2019.

Further, the company is reeling under adverse foreign currency translations. Notably, revenues in the fourth quarter included a 12% negative impact from foreign currency mainly due to sharp currency declines in Argentina and Turkey along with volatility in Brazil. Management expects foreign-currency impacts to weigh on the company’s top line in the to-be reported quarter.

Moreover, the consensus estimates for revenues in Europe, Middle East & Africa; South Latin America; North Latin America; and Asia-Pacific segments stand at $529 million, $425 million, $193 million and $110 million, declining 6.9%, 14.5%, 1.5% and 0.9% on a year-over-year basis, respectively.

Nevertheless, the company’s Open Up Avon strategy is on track to bring it back on growth trajectory. This strategy mainly focuses on reviving its direct-selling business model, renovating the brand, and enhancing e-commerce and other capabilities to aid a performance-driven transformation. Apart from these, the company announced plans to improve operating efficiency, slash inventory levels and reduce 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.

Speaking of operations in Brazil, Avon has shifted focus to e-commerce by setting up a dedicated team for the same. Post these efforts, the company witnessed online sales that already grew five times in the second half of 2018. Encouraged by this, management is optimistic about growth revival in this region, which may have positively impact the company’s first-quarter 2019 results. Also, the company seeks to enhance e-commerce and mobile capabilities across all regions in 2019.

Zacks Model

Our proven model does not conclusively show that Avon is likely to beat earnings estimates in the first quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. Meanwhile, stocks with a Zacks Rank #4 (Sell) or 5 (Strong Sell) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Avon has an Earnings ESP of 0.00% and a Zacks Rank #5. This combination makes surprise prediction inconclusive.

Stocks with a Favorable Combination

Here are some companies you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat:

Estee Lauder Companies EL has an Earnings ESP of +1.16% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Inter Parfums IPAR has an Earnings ESP of +5.73% and a Zacks Rank of 3.

Keurig Dr Pepper KDP has an Earnings ESP of +1.08% and a Zacks Rank #3.

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