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Will Soft Representatives Growth Mar Avon's (AVP) Q4 Earnings?

Zacks Equity Research

Avon Products, Inc. AVP is slated to release fourth-quarter 2018 results on Feb 14.

The company has a dismal earnings surprise trend, having lagged estimates in seven of the trailing nine quarters. Further, it witnessed average negative earnings surprise of 100% in the last 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 fourth-quarter earnings is pegged at 8 cents, reflecting a decline of 33.3% year over year. Notably, estimates remained stable over the past 30 days. For revenues, the consensus mark stands at $1.44 billion, mirroring roughly an 8% decrease from the prior-year quarter.

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

Factors at Play

Avon has been witnessing soft Representatives growth over the past 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. Although management is focused on boosting Representatives growth, increased costs toward reviving its direct selling business model are denting margins.

Higher cost of investments in Representatives, sales leader and field expenses along with elevated supply-chain costs remain added deterrents. In the last reported quarter, the new revenue standard had a negative impact on margins. These factors might hurt margins and overall profitability in the to-be-reported quarter.

In addition, foreign currency translations continue to adversely impact Avon’s performance. In the third quarter, revenues included a 10% negative impact from currency. Unfortunately, management expects the impacts from foreign currency to be similar in the fourth quarter.

Further, the consensus estimates for revenues for Europe, Middle East & Africa, South Latin America, North Latin America and Asia Pacific segments, stand at $580 million, $478 million, $197 million and $134 million, respectively. These figures represent a respective decline of 9.7%, 16.9%, 3.9% and 3.6% for the segments on a year-over-year basis.

Nevertheless, Avon is focused on accomplishing long-term financial targets for 2021 backed by the "Open Up Avon" strategy. This initiative 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. Additionally, the company remains committed to its cost-saving endeavors to drive margins. Management expects to achieve the targeted run-rate savings of $350 million for 2018.

Recently, the company announced plans to improve operating efficiency, slash inventory levels and reduce portfolio complexity. It plans to do so by certain restructuring efforts, including 25% decrease in Stock Keeping Units, 15% reduction in inventory levels and 10% job cuts.

Avon has also been making significant improvements in servicing the Representatives by improving delivery and services at its distribution centers. While these growth initiatives raise optimism, soft Representatives growth and higher spending remain major concerns in the fourth quarter.

Zacks Model

Our proven model does not conclusively show that Avon is likely to beat earnings estimates in the fourth 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 #4. This combination makes surprise prediction inconclusive.

Stocks With Favorable Combination

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

Turning Point Brands, Inc. TPB has an Earnings ESP of +11.11% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Monster Beverage Corporation MNST has an Earnings ESP of +0.31% and a Zacks Rank of 2.

Newell Brands Inc. NWL has an Earnings ESP of +7.41% and a Zacks Rank #3.

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