Earnings Scorecard: Avon Products

Avon Products Inc. (AVP) recently posted fourth-quarter 2010 adjusted earnings of 59 cents a share, which fell short of the Zacks Consensus Estimate of 67 cents and dipped 13.2% from the year-ago figure of 68 cents a share.

For fiscal 2010, the company reported adjusted earnings per share of $1.80 compared with $1.75 in the prior year. Earnings also failed to meet the Zacks Consensus Estimate of $1.89 per share.

On a reported basis, including one-time items, earnings dropped 15% to 53 cents per share, in the quarter under review, from 62 cents per share in the year-ago quarter. For fiscal 2010, earnings fell 4% to $1.39 per share.

Quarterly Review

Total sales of the company rose 1.0% year over year to $3,175.6 million compared with $3,134 million a year ago, backed by a surge in pricing and synergistic acquisitions. However, revenues earned remained below the Zacks Consensus Estimate of $3,277.0 million.

The company’s beauty product sales slipped 1.0%, driven by growth across all categories marred by skin care and color, which declined 12.0% and 2%, respectively.

Avon’s gross margin contracted 90 basis points year over year to 61.8% due to higher product cost and an adverse product mix, offset partially by improved pricing. Operating profit also fell 6% while operating margin contracted 100 basis points to 13.1%.

Guidance

Despite the lukewarm quarter, the company hinted that strong field programs coupled with an innovative pipeline should result in mid single-digit constant dollar revenue growth in 2011.

Agreement of Analysts

Analyzing estimate revision trends, following the 2010 earnings report, we find a predominantly negative sentiment among the analysts for the upcoming fiscal year 2011 and 2012. Over the last 30 days, 14 of the 15 analysts covering the stock have revised their estimates downward with no upward movement by any analyst for fiscal 2011 while for fiscal 2012, 9 of the 11 analysts covering the stock have decreased their estimates in the last 30 days without any movement in the opposite direction.

For the next two quarters the analyst community holds a similar pessimistic view. For the first quarter of fiscal 2011, 8 out of 13 analysts have revised their estimates downward over the past one month. For the second quarter of fiscal 2011, 6 out of 11 analysts have lowered their estimates with no upward movement.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for Avon depicts a pessimistic outlook of analysts for the first quarter and fiscal 2011 driven by the downward bias in estimates. Over the last 30 days, estimates for the first and the second quarters of fiscal 2011 have decreased by 4 cents and 3 cents, respectively. Likewise, estimates for Avon’s fiscal year 2011 and 2012 have decreased by 14 cents and 12 cents, respectively.

Our Recommendation

Avon currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating. However, our long-term recommendation remains Neutral.

Avon Products is a leading global beauty company and, as the world’s largest direct seller of beauty and related products, targets women consumers in over 100 countries through 6.2 million independent sales representatives. The company also derives a substantial portion of its revenue from high-growth emerging markets, which offer a significant future upside potential.

Avon is in the midst of a multi-year restructuring program that primarily accelerates investments toward targeted growth opportunities, streamlines worldwide manufacturing operations, improves cost effectiveness of administrative operations and enhances organizational effectiveness. The restructuring program is expected deliver annualized savings of more than $430 million when fully implemented by 2012.

Management is undertaking restructuring initiatives in an effort to save costs and boost profitability, which augurs well for future operating performance.

On the other hand, 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.

Worldwide, 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 competes head-to head with Revlon Inc. (REV).

AVON PRODS INC (AVP): Free Stock Analysis Report

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