Avon Products Still Neutral - Analyst Blog

We maintain our long-term Neutral recommendation on the world's largest direct seller of beauty and related products, Avon Products Inc. ( AVP ).

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 in 2013.

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 Revlon Inc. ( REV ).

Avon currently holds a Zacks #3 Rank, implying a short-term Hold rating on the stock.

AVON PRODS INC ( AVP ): Free Stock Analysis Report

REVLON INC-A ( REV ): Free Stock Analysis Report

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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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