We have downgraded
Avon Products Inc.
), one of the leading global beauty companies, to 'Underperform'
after the company posted disappointing first-quarter 2012 results.
Currently, the stock has a Zacks #5 Rank, implying a short-term
'Strong Sell' rating.
The company reported a year-over-year decline in its bottom line
along with contraction in margins for the third consecutive
quarter. Avon's adjusted earnings of 10 cents per share for the
first quarter of fiscal 2012 fell short of the Zacks Consensus
Estimate of 28 cents and plummeted nearly 73% from the prior-year
period.The weak quarterly performance resulted from increased input
costs, higher labour costs as well as increased operating expenses.
Moreover, the company's net sales inched down 2% reflecting a fall
of 1% in total units, partially offset by a favourable price
Moreover,Avon's North American market continues to remain
sluggish with sales falling 4% in the first quarter of fiscal 2012.
We believe the company's initiatives to change the product mix and
reposition the business in the U.S. market will involve significant
expenditure to support increased advertising and promotional
activities, which may exert pressure on margins to some extent.
Battered by continuous wretched quarterly performance and
macroeconomic pressures, the company intends to focus on its
top-line growth, cost management and cash generation with a lower
focus on margin recovery.
Further,we believe Avon has missed the opportunity of reviving
itself after Coty Inc. declared its lack of interest in acquiring
Avon given the company's reluctance to enter into discussions since
the initial offer was made in March 2012.We believe that the
combination would have created an iconic beauty company that would
provide new growth opportunities for the merged entity.
In addition, Avon's financial performance may be substantially
affected due to its significant presence in international markets
(81% of total revenue in fiscal 2011), which exposes it to
unfavourable foreign currency translations, economic or political
instability and other governmental actions on trade and
repatriation of foreign profits.
Above all,Avon faces competition from various products and
product lines both domestically and internationally. The beauty and
beauty-related products industry is highly competitive and the
number of competitors and degree of competition in this industry
varies widely from country to country. Globally, Avon competes with
products sold to consumers by other direct-selling and direct-sales
companies and through the Internet and against products sold
through the mass market and prestige retail channels.The company
faces stiff competition from
AVON PRODS INC (AVP): Free Stock Analysis
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