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Soft Representatives Growth Hurts Avon: Is There a Way Out?

Zacks Equity Research

Avon Products, Inc. AVP is in troubled waters due to dismal surprise trend mainly stemming from soft Representatives growth. Notably, the company lagged earnings estimates in four of the last six quarters, with negative sales surprises in six of the trailing nine quarters.

Avon has been battling with decline in its Active and Ending Representatives for the last few quarters now. In third-quarter 2018, the Active and Ending Representatives fell 5% and 6%, respectively, with decline in both the Representatives across each of the company’s segments.

These factors have taken a toll on the company’s price performance. Consequently, shares of this Zacks Rank #4 (Sell) company have declined 17% in the past year. Also, we note that the overall trends in the Cosmetics industry have not been favorable, leading to an 18.6% decline for the same.

Other Shortcomings

Though management is focused on boosting Representatives growth, higher spending toward rebooting its direct selling business model has been significantly weighing on the company’s margins. Evidently, adjusted gross margin contracted 410 basis points (bps) year over year due to higher supply-chain costs, partly negated by favorable price/mix. Also, adjusted operating margin fell 360 bps on unfavorable year-over-year comparisons from investments in Representatives, sales leader and field expenses.

Additionally, elevated advertising and net brochure expenses, mainly in Brazil, are denting margins. In the last reported quarter, the new revenue standard also had a negative impact on margins.

Furthermore, stiff competition in the industry and other macroeconomic issues may act as deterrents. In fact, Avon’s revenues in the third quarter included a 10% negative impact from foreign currency, primarily due to sharp declines in Argentina and Turkey. Volatility in Brazil is another concern. Unfortunately, management expects the impacts from foreign currency to be similar in the fourth quarter.

Can Avon’s Growth Plans Revive the Stock?

Avon remains committed to accomplish long-term financial targets for 2021, thanks to its new growth strategy. The "Open Up Avon" strategy is aimed at bringing Avon back on the growth trajectory, by focusing on reviving its direct selling business, renovating the brand, enhancing e-commerce and other capabilities to aid a performance-driven transformation.

By 2021, the company intends to generate total cost-savings of $400 million by optimization of manufacturing and distribution; outsourcing efficiencies; zero-based redesigning of back-office functions; and managing revenues, interest and tax. Management also expects to invest roughly $300 million in commercial, digital & IT infrastructure projects. It aims to reinforce its financials, wherein its cash-generating abilities must exceed the investment plans. Moreover, it expects to achieve revenue growth in a low-single digit and margins in low-double digits.

Encouragingly, the cosmetics leader is progressing well with cost-saving plans to drive margins. Avon accomplished a total cost savings of roughly $40 million before taxes in the third quarter. It is expected to achieve the targeted run-rate savings of $350 million for 2018. Notably, the company exceeded the cost-saving target of $230 million, realizing more than $250 million in 2017.

Avon’s focus on reigniting and re-energizing its Representatives through various strategic measures is also commendable. In this regard, it is imperative to mention that management has made significant improvements in servicing the Representatives by improving delivery and services at its distribution centers. Further, it has adopted a new segmented approach to differentiate between the Representatives, and is rewarding them accordingly. The company has also started imparting training for its Representatives by setting up a new global academy to deliver training in each country.

While the aforementioned initiatives look encouraging, soft Representatives growth remain a concern. Therefore, we are currently on the back foot and await more positive developments before favoring the stock.

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

Archer Daniels Midland Company ADM delivered a positive earnings surprise in each of the trailing four quarters, the average being 26.9%. Also, the company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Blue Apron Holdings, Inc. APRN is also a Zacks Ranked #1 stock, which has delivered average earnings beat of 19% in the last four quarters.

Nomad Foods Limited NOMD has an impressive long-term earnings growth rate of 11% and a Zacks Rank #2 (Buy).

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