We maintain our long-term Neutral recommendation on the world's
largest direct seller of beauty and related products,
Avon Products Inc.
Our recommendation on Avon is supported by the company's ongoing
restructuring initiatives and expectations of robust results from
its new distribution facility in Brazil, offset by wretched
fourth-quarter performance, sluggishness in the North American
market, expectations of poor margins and macroeconomic issues.
Avon is in the midst of a multi-year restructuring program that
primarily accelerates investments toward targeted growth
opportunities, streamlines worldwide manufacturing operations, and
improves cost effectiveness while enhancing organizational
effectiveness. The restructuring program is expected to deliver
annualized savings of more than $430 million when fully implemented
Recently, Avon built a $150.0 million state-of-the-art
distribution site in Cabreuva, Brazil, which has the capacity to
ship 70% of Brazil's overall unit volume. The new distribution
center has a feature of advance order picking technology, which
will help in improving productivity and order accuracy.
However, the leading global beauty company's fourth-quarter 2011
earnings of $0.39 per share, missed the Zacks Consensus Estimate of
$0.51 and dipped over 51% from the prior-year quarter, primarily
due to sluggish performance delivered by the company's each and
every category. During the quarter, the company's total sales
declined over 4% year over year to $2,997.9 million compared with
$3,137.8 million a year ago. Total revenue also missed the Zacks
Consensus Estimate of $3,102 million.
Battered by the wretched fourth-quarter performance and
macroeconomic pressures, the company plans to focus on its top-line
growth, cash generation and cost management in fiscal 2012 with
least focus on margin recovery, indicating a year of changeover for
Avon. Going forward, the company's initiatives to change the
product mix and reposition the business in the U.S. market will
require significant advertising and promotional expenditures, which
may dent its margins.
Further, the North American market continues to be sluggish with
sales falling 7% in fourth-quarter 2011. Looking ahead, the company
does not see any signs of recovery from the sluggishness in the
market. We believe this should have a considerable impact on the
company's 2012 results.
Avon, which targets women consumers in over 100 countries
through 6.5 million independent sales representatives, derives a
substantial portion of its revenue from high-growth emerging
markets, offering a significant future upside potential.
Globally, Avon competes against products sold to consumers by
other direct-selling and direct-sales companies and through the
Internet and against products sold in the mass market and through
prestige retail channels. The company faces stiff competition from
Avon currently holds a Zacks #3 Rank, implying a short-term Hold
rating on the stock.
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