It has been about a month since the last earnings report for Avon Products (AVP). Shares have added about 0.5% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Avon due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Avon’s Q2 Earnings Beat, Sales Miss Estimates
Avon delivered bottom-line beat in second-quarter 2019, driven by improvement in adjusted operating margin and continued progress on the “Open Up Avon” strategy.
Avon’s adjusted earnings of 6 cents per share beat the Zacks Consensus Estimate of 4 cents. In the year-ago quarter, it recorded loss per share of 3 cents.
On a GAAP basis, the company incurred a loss of 3 cents per share compared with a loss of 9 cents registered in the year-ago quarter.
Q2 in Detail
Total revenues for Avon declined 13% year over year to $1,174.8 million and also lagged the Zacks Consensus Estimate of $1,246 million. In constant dollars, total revenues dipped 5%.
Further, total Reportable Segment revenues (in reported currency) declined 12% to $1,170.3 million mostly due to adverse currency movements, offset by benefits of favorable price/mix and rise in Average Representatives sales.
In constant currency, total Reportable Segment revenues dropped 5%. Currency headwinds impacted the company’s revenues by 8%.
Average Representatives sales in constant dollars from Reportable Segments improved 5% while price/mix rose 9%, driven by growth in all reportable segments.
The improved price/mix and Average Representatives sales were driven by the smooth execution of the Open Up Avon strategy with an increased focus on productivity initiatives in the second quarter, including lesser discounts, more effective incentives, optimized promotions and a more favorable mix.
Adjusted gross margin contracted 170 basis points (bps) to 58.4%, driven by the adverse impact of currency headwinds.
However, the company’s stringent focus on pricing and productivity gains during the quarter drove adjusted operating margin expansion as well as improved cash flow.
While the company’s operating margin on a GAAP basis contracted 130 bps, adjusted operating margin expanded 190 bps to 7.6%.
This growth was mainly driven by increased savings across multiple cost lines and improved price/mix due to pricing efforts. The rise came despite adverse impacts of foreign currency, which impacted adjusted operating margin by 160 bps, particularly from Brazil, Argentina and Turkey.
Avon’s Europe, Middle East & Africa segment generated revenues of $425.1 million, which fell 15% year over year. On a currency-neutral basis, revenues were down 8%. Results included a 9% decline in Active Representatives and a 14% fall in units sold. These were offset by 6% growth in price/mix and 1% rise in Average Representatives Sales.
South Latin America’s revenues declined 14% to $443 million and remained flat on a constant-dollar basis. In the reported quarter, Active Representatives declined 12%, with units sold falling 17%. However, the segment witnessed a 12% increase in Average Representatives Sales and a 17% rise in price/mix.
North Latin America’s revenues dropped 7% year over year to $193.8 million and were down 6% in constant dollars. While Active Representatives were down 10% year over year, units sold fell 8%. However, the segment reported a 4% gain in Average Representatives Sales and 2% growth in price/mix.
Asia Pacific’s revenues declined 4% to $108.4 million and dropped 3% in constant dollars mainly as Active Representatives and units sold fell 9% each. However, this was partly offset by a 6% rise each in Average Representatives sales and price/mix.
Avon ended the quarter with cash and cash equivalents of $421 million, long-term debt of $1,197 million, and total shareholders’ deficit of $964.5 million (excluding non-controlling interests).
As already stated, pricing and productivity initiatives under the Open Up Avon strategy significantly aided profitability and free cash flow in the second quarter.
The company reported free cash flow of $26.3 million in the quarter, marking a $59.6-million improvement from the negative free cash flow of $33.3 million in the year-ago quarter.
Additionally, net cash provided by operating activities as of Jun 30, 2019, was $7.1 million, improving $17.5 million from the year-ago quarter period. This was driven by improvements in earnings and working capital as well as $30 million in cash generated from the sale of assets in the Malaysia and Rye facilities.
The company remains on track for positive cash flow generation in 2019, driven by continued profit generation along with working capital efficiencies and monetization of non-core assets. Further, it is likely to benefit from self funding of the transformation plan.
In April 2019, Avon agreed to sell 19.9% ownership interest in New Avon to LG Household & Health Care Ltd. New Avon is a privately-held company that is majorly owned and managed by an affiliate of Cerberus.
LG Household & Health Care agreed to pay $125 million for the purchase, with Avon receiving about $24.9 million for its 19.9% stake. The transaction is likely to close on Sep 30, 2019.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a flat path over the past two months. The consensus estimate has shifted -22.22% due to these changes.
Currently, Avon has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Avon has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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