Avon (AVP) Misses Q4 Earnings; Transformation Plan on Track

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Avon Products Inc.AVP delivered a dismal fourth-quarter 2016, wherein both top and bottom lines missed estimates. Results were primarily impacted by fall in Active Representatives, which took a toll on revenues, as well as a sudden rise in bad debt expenses.

Consequently, shares of this beauty products retailer declined 7.9% in the pre-market trading session. However, Avon's shares have soared by a substantial 71.2% in the past one year, outperforming the Zacks categorized Cosmetics & Toiletries industry that declined 13.9% in the same time frame.

The company posted adjusted earnings from continuing operations of 1 cent per share for fourth-quarter 2016, lagging the Zacks Consensus Estimate of 9 cents. However, results compared favorably with break-even results in the year-ago quarter.

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On a reported basis, the company posted loss per share of 3 cents per share compared with a loss per share of 4 cents in the year-ago quarter.

Deeper Insight

Total revenue fell 2% year over year to $1,568.1 million and missed the Zacks Consensus Estimate of $1,602 million. On a constant currency basis, total revenue remained flat with the prior-year quarter.

Active Representatives declined 3% compared with the prior-year quarter, while Ending Representatives dipped 2%. Active Representatives were hurt by decline in Asia Pacific and Europe, the Middle East and Africa (EMEA). Increase in EMEA and South Latin America benefited Ending Representatives, negated by fall in Asia Pacific. Average orders were up 2% due to an increase in South Latin America, Asia Pacific and North Latin America, partly compensated by a fall in EMEA.

Adjusted gross margin expanded 150 basis points (bps) year over year to 60.3% on the back of pricing gains offset by negative currency impacts.

Adjusted operating profit increased 18% to $114.2 million, while adjusted operating margin expanded 130 bps to 7.3%. Operating margin gained from the improved price/mix, synergies from cost-saving initiatives and decline in compensation expenses, offset by higher bad debt expenses - particularly in Brazil, and adverse currency movements.

Segment Performance

Avon's revenues of $620.5 million in Europe, the Middle East and Africa declined 7% year over year. On a currency neutral basis, revenues dipped 3%, mainly driven by a 2% fall in Active Representatives and 1% decline in average orders. Price/mix in the region went up 5%, while units sold declined 8%. Ending Representatives grew 3%.

Revenues in South Latin America increased 9% year over year to $589 million and 6% in constant-dollars, mainly driven by 7% growth in average orders partly negated by 1% decline in Active Representatives. Constant dollar revenue growth included a 3 points benefit from higher prices in Argentina. Units sold were down 8%, while Ending Representatives jumped 1% and price/mix rose 14%.

North Latin America reported a revenue decline of 10% year over year to $204.1 million, while the same increased 1%, in constant-dollars, benefiting from a 1% gain in average orders. Also, price/mix escalated 10% while units sold fell 9%. While Active Representatives remained flat, Ending Representatives were down 1%.

The Asia-Pacific division's revenues fell 9% to $144.5 million and decreased 6% in constant dollars. The decline was due to lower revenues in most markets, neutralized by modest growth in Philippines. A 9% fall in Active Representatives contributed largely to the decline, partly offset by 3% increase in average orders. During the quarter, Ending Representatives declined 11% and units sold fell 5%, and price/mix dropped 1%.

Financial Details

Avon exited 2016 with cash and cash equivalents of $654.4 million, long-term debt of $1,875.8 million, and shareholders' deficit of $848 million (excluding non-controlling interests).

Transformation Plan Update

In 2016, the company made significant progress toward the Transformation Plan that was announced in Jan 2016. In the first year of this three-year plan, the company surpassed cost saving targets and considerably improved its balance sheet. Evidently, in 2016, the company went ahead of schedule and realized roughly $120 million in savings. For 2016, the company had targeted $70 million cost savings, along with about $20 million savings in stranded costs related to the separation of its North American business.

Further, as part of improving financial resilience, management reduced debt by about $260 million this year, which also surpassed its targeted reduction of $250 million. Moroever, the company's balance sheet strength was enhanced by the extension of its long-term debt maturity profile to Mar 2019.

Avon's Transformation Plan mainly focuses on investing in growth, enhancing cost structure and improving financial flexibility. In this regard, management plans to invest nearly $350 million over a three year period starting 2016, including $150 million toward media and social selling; and $200 million for service model evolution and information technology. This is mainly aimed at bolstering the overall Representative experience.

Further, the company is on track to deliver cost savings of $350 million over a three-year period, including $200 million from supply chain reductions and about $150 million from other cost reductions.

Avon Products, Inc. Price, Consensus and EPS Surprise

Avon Products, Inc. Price, Consensus and EPS Surprise | Avon Products, Inc. Quote

Zacks Rank

Avon currently carries a Zacks Rank #3 (Hold). Investors can count on better-ranked stocks like Helen of Troy Limited HELE , Genesco Inc. GCO and Zumiez Inc. ZUMZ , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Helen of Troy, with a long-term earnings growth rate of 10.8%, has jumped nearly 7% in the past six months.

Genesco has to its credit a spectacular earnings history as the company delivered an average positive earnings surprise of 31.4% in the past four quarters. Moreover, its long-term EPS growth rate of 9.5% and positive estimate revisions in the past 30 days help it stand strong against the industry.

Zumiez has grown nearly 25.5% in the past six months. The stock has a long-term EPS growth rate of 15%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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