Avon Products Inc. (AVP) is engaged in selling personal care products, fashion apparel and accessories, as well as home goods. Its geographical segments are Latin America, EMEA region, North America and Asia Pacific. 46% of revenues in the first six months of 2012 came from Latin America, followed by EMEA with 26%. Revenues have been declining in all regions, according to the latest quarterly results (Q22012). The pressure exerted through discretionary spending by consumers will continue to pull down margins, along with the heavy promotional expenditures that will be needed to attract customers. We think that investors should stay away from AVP because of its declining margins and because its dividend is likely to be cut.
Q22012 earnings missed analyst estimates of $0.21/share by 1 cent/share, with EPS dropping by 59% YoY. Sales of $2.6 billion were down by 9% from the same period last year, and in the process, missed analyst estimates of $2.7 billion. This was due to a weak performance across all regions where Avon has operations. The company had also missed analyst estimates for EPS in the last 5 quarters.
The operating and net profit margins (trailing twelve months) are nearly half of their 5-year averages. For instance, net profit margin of 2.33% is even less than half the 6% average for the last 5 years. Revlon's (REV) net profit margin is 4% (6% being the 5-year average), Estee Lauder's (EL) is almost 9% (6.6% is the 5-year average), and Elizabeth Arden's (RDEN) is 4.6% (2.3% is the 5-year average). Therefore, all peer companies are doing better than AVP, and a majority are doing better than their 5-year averages. Savings accruing from the company's restructuring efforts undertaken under its 2005 and 2009 programs have been partly offset by advertising costs.
The company continues to face probes regarding allegations for bribing in China and other countries, although one of the investigations regarding providing analysts improper material information has been closed, with the SEC not planning to take any action. Still, Avon will continue to face significant legal fees. In July, internal and external investigations for bribery cost $250 million; this figure continues to increase. The penalties from unfavorable results to litigation can run over $50 million, as seen in the Johnson and Johnson (JNJ) bribery penalty of $70 million last year.
The company has a very high dividend yield to offer: 5.8%. It has raised its dividends every year since 2000 to a quarterly dividend of 23 cents per share. However, the dividend is not safe, owing to declining profits and a payout ratio of 160% (trailing twelve months), according to Reuters.
Among the latest ratings given to AVP are Barclay Capital's reiteration of an equal weight rating with a price target of $17, and Zacks' reiteration of an underperform rating with a price target of $15. Citigroup reiterated its buy rating with an $18 target price.
The forward P/E for AVP is 16x as compared to Revlon's 11x, Elizabeth Arden's 15x, Estee Lauder's 24x and L'Oreal SA's (LRLCY) 20x. At consensus EPS estimates for 2013 of $0.99 and a forward P/E multiple of 16x, the price comes out to be $16.
To reiterate, we advise investors against buying AVP, as it seems to be evenly priced at the moment, and there is no catalyst for the stock to move up. Moreover, a dividend cut is imminent if the present decline in profitability continues.