Avon Reports Disappointing 2Q - Analyst Blog
August 01 2012 - 7:14AM
Zacks
Avon Products Inc. (AVP) posted a disappointing
second-quarter 2012 with adjusted earnings falling over 59% to 20
cents a share from 49 cents in the year-ago quarter due to lower
sales coupled with higher input cost inflation and increased
operating expenses. Moreover, quarterly earnings fell short of the
Zacks Consensus Estimate of 21 cents per share.
On a reported basis, including one-time items, earnings fell
70.2% to 14 cents per share compared with 47 cents recorded in the
year-ago quarter.
During the reported quarter, the company’s total revenue
declined 9% year over year to $2,591.7 million compared with
$2,856.4 million a year ago. The decline in sales was mainly
attributable to a fall of 4% in total units, partially offset by a
benefit of 3% from favorable price mix. Moreover, total revenue
missed the Zacks Consensus Estimate of $2,685.0 million.
Avon registered a revenue decline in every category of products
with Home products dropping 12%, followed by Fashion and Beauty
Products categories exhibiting declines of 10% and 9%,
respectively.
Avon’s adjusted gross margin fell 160 basis points year over
year to 62.8%, primarily due higher product costs and effect of
unfavorable foreign currency translation. Adjusted operating profit
dwindled 41.7%, while operating margin contracted 510 basis points
to 6.4%, attributable to lower sales and gross margin along with
higher operating expenses.
Region-wise Performance
Avon delivered 9% revenue decline in Latin
America, primarily due to 19% and 7% declines in
Brazil and Mexico, respectively, partially offset by a 26% rise in
Venezuela. Units sold declined 3% during the quarter, while Active
representatives inched up 1% year over year.
Adjusted operating profit plunged 38% to $122 million, while
adjusted operating margin contracted 470 basis points (bps) to
9.8%. The year-over-year contraction in margin was primarily due to
lower gross margin as well as increased overhead expenses.
In North America, sales decreased 6%
year over year, with U.S. core business declined 4%, while active
representatives fell 12%. Units sold in the region during the
quarter declined 4% year over year.
Accordingly, the company’s adjusted operating profit plunged 94%
year over year to $1.9 million and adjusted operating margin shrunk
600 bps to 0.4%, owing to lower gross margin, higher overhead costs
and implementation of One Simple Sales Model.
The beauty product manufacturer’s revenues in
Europe, Middle East and Africa slipped
14% year over year, primarily due to weak performances in every
region. Avon registered a 3% fall in active representatives, while
units sold were down by 7% during the quarter.
Adjusted operating profit plummeted 39% to $79.4 million during
the quarter, while as a percentage of sales it contracted 480 bps
to 12%. Low revenue and high brochure costs coupled with bad-debt
expenses dragged the adjusted operating margin downwards.
The Asia-Pacific division witnessed a
4% dip in revenues. The region marked a 7% decline in Active
representatives and a 6% fall in units sold. Adjusted operating
profit in the region dropped 8% to $15.2 million, while as a
percentage of sales it contracted 30 bps to 7% due to lower gross
margin along with higher bad-debt expenses.
Other Financial Details
The leading global beauty company exited the quarter with cash
and cash equivalents of $1,276.4 million, long-term debt (excluding
current maturities) of $2,581.1 million, and shareholders’ equity
of $1,423.0 million.
During the six-month period ended June 30, 2012, the company
earned net cash of $41.1 million for operational activities as
against $101.2 million in the comparable quarter last year. Avon
expended $87.7 million in capital expenditure.
Guidance
Battered by continuously wretched quarterly performance and
macroeconomic pressures, Avon is actively focusing on its top-line
growth, cash generation and cost management in the current fiscal
year, reflecting a year of changeover.
This global beauty company is the world's largest direct seller
of beauty and related products. It targets women consumers in over
100 countries through 6.4 million independent sales
representatives. The company also derives a substantial portion of
its revenue from high-growth emerging markets, which offers a
significant upside potential for the future.
Globally, Avon competes against direct-selling companies, online
retailers and products that are sold in the mass market through
prestigious retail channels. The company faces stiff competition
from another beauty products giant, Revlon Inc.
(REV).
Avoncurrently retains a Zacks #4 Rank, which translates into a
short-term Sell rating. Our long-term recommendation on the stock
is Underperform.
AVON PRODS INC (AVP): Free Stock Analysis Report
REVLON INC-A (REV): Free Stock Analysis Report
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