Bear of the Day: Avon (AVP) - Bear of the Day

By Zacks | May 06, 2014 AAA

Avon Products (AVP) is a leading global beauty company, with nearly about $10 billion in annual revenue. The company is the world's largest direct seller with more than 6 million active independent sales representatives.
 
Avon products are available in over 100 countries, and the products include color cosmetics, skincare, fragrance, fashion and home products, under brand names like Avon Color, ANEW, Skin-So-Soft and Advance Techniques.
 
Disappointing Results and Deteriorating Fundamentals

AVP reported Q1 results on May 1, 2014. Total revenues were down 11% to $2.2 billion with Beauty sales down 12% and Fashion & Home sales down 9%. On a constant currency basis, total revenues declined 3% year over year.

The weakness was seen in almost all geographical segments, with revenue down 41% in China, 23% in Russia, 12% in Mexico and 10% in Brazil, partly due to currency headwinds.
 
Adjusted net income from continuing operations was $52 million, or $0.12 per share, compared with net income of $113 million, or $0.26 per share, for the prior-year quarter. Earnings were substantially short of the Zacks Consensus Estimate of $0.20 per share.

According to the management, the business performed well in Latin America but weakness in EMEA remained a concern. In North America, while a lot of work remains to be done to bring the business back to profitability, the management said that they have been making continued progress towards their goal.
 
Negative Earnings Estimates Revisions
 
As a result of worsening outlook for the company, analysts have been cutting their estimates for AVP. Zacks Consensus Estimates for the current and the next year now stand at $0.91 and $1.11 per share, down from $1.01 and $1.18 per share, 7 days ago. Declining estimates sent AVP to Zacks Rank # 5 last week.
 
The following chart shows the trend of declining estimates for AVP:


 
Bribery Probe Settlement
 
Last week, Avon reached a settlement the regulators to pay $135 million in fines over a bribery investigation.  The bribery probe which has been going on since 2008, has already cost the company more than $340 million in legal and other related expenses.
 
Better Play?
 
Cosmetics industry is currently ranked 171 out of 265 Zacks industries (bottom 35%). There is no stock with a Zacks Rank # 1 in this industry as of now. Given its weak outlook, investors may like to avoid the industry for the time being.
 
The Bottom Line
 
Avon’s turnaround efforts do not seem to be working. With poor execution strategy and declining sales force, the outlook does not appear to be brightening anytime soon. Investors should therefore avoid this stock for the time being.
 
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