Avon Products: Earnings Preview

| About: Avon Products, (AVP)

Avon Products Inc. (NYSE:AVP), the world's largest direct seller of beauty and related products, is slated to release its first-quarter 2012 results on Tuesday, May 1, 2012, before the market opens. The current Zacks Consensus Estimate for the first quarter stands at 28 cents per share, indicating an estimated year-over-year decline of about 24.3%. Revenue, as per the Zacks Consensus Estimate, is $2,526 million.

The earnings surprise scenario at Avon was disappointing due to the company's weak top line and higher costs. The company has missed the Zacks Consensus Estimate in the last three out of four quarters with the average surprise for the trailing four quarters remaining at negative 6.3%.

Fourth Quarter Synopsis

Avon Products Inc. posted fourth-quarter 2011 adjusted earnings of 39 cents a share, missing the Zacks Consensus Estimate of 51 cents a share. Moreover, the results decreased over 51% from the year-ago earnings of 59 cents a share, primarily due to higher cost inflation coupled with increased operating expenses. On a reported basis, including one-time items, earnings fell 100% to zero cents per share compared with earnings of 50 cents in the year-ago quarter.

For full fiscal 2011, earnings declined almost 10% to $1.64 per share from the previous fiscal earnings of $1.80, missing the Zacks Consensus Estimate of $1.76. On a reported basis, including one-time items, earnings fell nearly 12% to $1.20 per share compared with $1.36 in the previous fiscal.

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. The decline in revenue was mainly attributable to a fall of 2% in total units, partially offset by benefit from favorable price and product mix. Besides, total revenue also missed the Zacks Consensus Estimate of $3,102 million.

Agreement of Estimate Revisions

For the first quarter of fiscal 2012, none of the 13 analysts made positive revisions while 2 of them moved their estimates downwards in the last 30 days. Estimates for fiscal 2012 also witnessed a similar trend with no upward revision to estimates and 1 downward movement, in the last 30 days.

In the last 7 days, no movement in estimates has been noticed in either direction for first-quarter 2012 or fiscal 2012. This indicates that the analysts do not see any major catalyst driving the quarterly results.

Magnitude - Estimate Trends

Withstanding the fewer negative movements in estimates in the last 30 days and no revisions in the last 7 days, the Zacks Consensus Estimate for the first quarter and fiscal 2012 remained intact in both periods. The Zacks Consensus Estimates for first-quarter 2012 remains at 28 cents per share and $1.50 per share for fiscal 2012.

Thus, the magnitude of estimate revisions for Avon Products depicts a neutral outlook for the upcoming quarter and fiscal 2012.

Our Take

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 advanced order picking technology, which will help in improving productivity and order accuracy.

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.

The company also faces stiff competition from other direct-selling companies as well as companies selling through prestige retail channels. One of the prime competitors of Avon is Revlon Inc. (NYSE:REV).

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

We remain hopeful of Avon's ongoing restructuring initiatives and expectations of robust results from its new distribution facility in Brazil. However, our neutral outlook on the stock resulted from the company's wretched fourth-quarter performance, sluggishness in the North American market, and expectations of poor margins as well as macroeconomic issues.