On Sep 11, 2013 we downgraded global beauty company,
Avon Products Inc.
), to Neutral, based on the company's declining revenue trend in
North America and currency devaluation in Venezuela, which pose a
threat to its near-term growth.
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Why the Downgrade?
Estimates for Avon, have been declining ever since it reported
fiscal second-quarter results on Aug 1. Avon's second-quarter
revenues of $2,508.9 million missed the Zacks Consensus Estimate
of $2,573.0 million. However, adjusted earnings of 29 cents per
share surpassed the Zacks Consensus Estimate of 26 cents.
Following the second-quarter results, the Zacks Consensus
Estimate for 2013 has gone down 5.2% to $1.09 per share in the
last 60 days. The Zacks Consensus Estimate for 2014 has also
declined 3.6% to $1.34 per share over the same period. The
company also currently carries a Zacks Rank #3 (Hold).
Causes of Concern
Over the last three years, Avon has witnessed a decline in
revenues in North America, especially the U.S. mainly due to
decrease in active representatives, partly offset by larger
average order. Total revenue from this region in 2009, 2010, 2011
and 2012 was $2,293.4 million, $2,193.5 million, $2,064.6 million
and $1,906.8 million, respectively. Management remains concerned
about the downward trend in revenues, and has been constantly
striving to stabilize the situation.
Moreover, due to rising fiscal deficit and pressure on the Forex
market, the Venezuelan government devalued its currency in
February this year. This will help Venezuela to partially reduce
its fiscal deficit, but at the cost of high inflation in the
economy. Avon, which generates approximately 5% of total revenue
and 14% of operating profit from the country, may face challenges
in maintaining profitability if the Venezuelan government
restricts pricing decision of the companies to offset the
possible rise in raw material prices.
In the backdrop of the challenging scenario in the Americas, we
do not see any significant catalyst that could drive the
company's shares in the near term.
Still Prefer the Sidelines
Though Avon has been encountering challenges on various fronts,
we prefer to remain on the sidelines. This is due to the
strategic measures outlined by Avon focusing on accelerating
top-line growth, trimming down costs and improving working
capital. As part of its strategy, Avon decreased its quarterly
dividend substantially and aims to slash costs by $400 million
through 2016. We believe that Avon's turnaround strategies are
paying off, as is evident from its improved operating results in
the last 3 quarters.
The company's also closing operations in some underperforming
markets mainly in Europe, the Middle East & Africa region. We
believe these actions should help Avon streamline operations by
improving focus on high-priority markets and activities, as well
as enhance efficiencies
Other Stocks That Warrant a Look
Other stocks worth considering in the retail sector include
Citi Trends, Inc.
). All of these carry a Zacks Rank #1 (Strong Buy).