Avon Products: Earnings Preview

| About: Avon Products, (AVP)

Avon Products Inc. (NYSE:AVP) is scheduled to release its fourth-quarter 2011 results on Tuesday, February 14, 2012. The Zacks Consensus Estimate is 51 cents a share for the fourth quarter of fiscal 2011, reflecting a year-over-year estimated decline of 13.6%.

Synopsis of Third Quarter 2011

Avon Products’ adjusted earnings of 38 cents per share for third-quarter 2011 missed the Zacks Consensus Estimate of 46 cents and slipped 7.3% from the year-ago earnings of 41 cents. On a reported basis, including one-time items, earnings remained flat at 38 cents per share compared with the year-ago quarter.

The company’s total sales rose 5% year over year to $2,706.7 million from $2,580.1 million a year ago. Total revenue also missed the Zacks Consensus Estimate of $2,840 million.

Avon’s adjusted gross margin fell 60 basis points year over year to 64% as favorable currency impact coupled with improved pricing was more than offset by higher product cost. Operating profit reflected an increase of 4%, while operating margin contracted 20 basis points to 10.3%, attributable to lower gross margin.

Earnings Guidance

Battered by the wretched third-quarter performance and macroeconomic pressures, the company rolled back its earlier forecast. Avon no longer expects revenues to increase in mid-single digit in fiscal 2011 with an expansion of 50 to 70 basis points in operating margin.

Zacks Consensus

The analyst covered by Zacks expects Avon to post fourth-quarter 2011 earnings of 51 cents a share, lower than 59 cents delivered in the prior-year quarter. Currently, the Zacks Consensus Estimate ranges between earnings of 26 cents and 63 cents a share.

For fiscal 2011, the Zacks Consensus Estimate stood at $1.76 per share, lower than its previous fiscal earnings of $1.80. The current Zacks Consensus Estimate ranges between $1.50 and $1.88 per share.

Agreement of Estimate

For the fourth quarter of fiscal 2011, of the 13 analysts covering the stock, 4 analysts revised their estimates downward, while none have revised the same in the opposite direction in the last 30 days. For full fiscal 2011, 4 analysts revised their estimates in negative direction, while 1 analyst revised the same in the positive direction, in the last 30 days.

In the last 7 days, no movement in estimates has been noticed in either direction for fourth-quarter 2011 or fiscal 2011. This indicates that the analysts do not see any major catalyst driving the quarterly results.

Magnitude of Estimate Revisions

With heavy negative affect from earnings revisions by analysts in the last 30 days, the Zacks Consensus Estimates for fourth-quarter 2011 has decreased by 2 cents to 51 cents per share while for fiscal 2011 it lowered by 1 cent to $1.76 per share.

However, the magnitude of estimate revisions for Avon Products depicts a neutral outlook for the upcoming fourth quarter and fiscal 2011. Over the last 30 days, estimates for the upcoming quarter and fiscal 2011 have remained unchanged at 51 cents and $1.76 per share, respectively.

Surprise History

With respect to earnings surprises, Avon has missed as well as topped the Zacks Consensus Estimate over the last four quarters in the range of negative 17.4% to positive 19.4%. The average remained at negative 3%. This suggests that Avon has missed the Zacks Consensus Estimate by an average of 3% in the trailing four quarters

Our Take

We believe that the company’s initiatives to change the product mix and reposition the business in the U.S. market will require significant expenditure to support increased advertising and promotional activities, which may dent its margins. Furthermore, Avon is a highly leveraged company, limiting its financial flexibility to drive future growth.

Additionally, Avon competes against products sold to consumers by other direct-selling companies and against products sold in the mass market and through prestige retail channels. The company competes head-to head with Revlon Inc. (NYSE:REV).

Currently, Avon retains a Zacks #4 Rank, which translates into a short-term 'Sell' rating. Our long-term recommendation on the stock remains 'Underperform'.

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