We maintain our long-term 'Underperform' recommendation on
Avon Products Inc.
), the New York-based cosmetics giant, mainly due to its
disappointing second-quarter 2012 results. The poor showing
primarily reflects sluggish performances by the company at each and
every region where it operates, along with increased input costs
and operating expenses.
Weak sales and higher input and operating costs continued to
weigh upon the bottom-line performance of Avon. The company's
earnings of 20 cents per share for the quarter plummeted 59% from
the year-ago quarter's level, in the process missing the Zacks
Consensus Estimate by a penny.
Further, the company's net sales declined 9% year over year to
$2,591.7 million, again missing the Zacks Consensus Estimate of
$2,685 million. 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.
We believe Avon's shift of focus from representative growth,
technological up gradation and lack of attention towards commercial
sales and unfavorable product mix were the reasons behind its
stalled performance. As a result, Avon reported decline in its
revenue in every region it operates.
Going forward, we believe that Avon's initiatives to change the
product and price mix will require significant advertising and
promotional expenditures, which may weigh upon its margins.
Moreover, the sluggish discretionary spending, along with intense
competition and exposure to foreign currency may undermine the
company's future prospects.
Avon's financial performance may be substantially affected due
to its significant presence in international market (81% of total
revenue in fiscal 2011), which exposes it to unfavorable foreign
currency translations, economic or political instability and other
governmental actions on trade and repatriation of foreign
Based on the above analysis, we anticipate Avon Products to
perform below its peers in the coming months. Therefore, we see
little reasons for the investors to own this stock.
Avon, which competes with
), carries a Zacks #4 Rank, implying short-term Sell rating for the
next 1-3 months.
AVON PRODS INC (AVP): Free Stock Analysis
REVLON INC-A (REV): Free Stock Analysis Report
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