Avon Misses Estimates but Grows - Analyst Blog

Avon Products Inc. (AVP) recently posted second-quarter 2011 adjusted earnings of 49 cents a share, which barely missed the Zacks Consensus Estimate of 50 cents a share but gained 4.3% from the year-ago figure of 47 cents a share.

On a reported basis, including one-time items, earnings jumped 23.7% to 47 cents per share from 38 cents per share in the year-ago quarter.

Total sales of the company rose 8.0% year over year to $2,856.4 million compared with $2,628.5 million a year ago. Total revenue also marginally missed the Zacks Consensus Estimate of $2,894.0 million.

The company’s beauty product sales increased 8.0%, driven by growth of 11% in fragrance, 8% in color, 3% in skincare and 11% in personal care.

Sales by Region

Avon delivered 19% revenue growth in Latin America, primarily driven by a 1.0% increase in units sold and a 17.0% rise in Brazil, along with an impressive 27.0% growth in Mexico and 15% in Venezuela. Active representatives also grew 4.0%.

In North America, sales decreased 7.0% year over year, pulled down by a 16.0% decline in units sold, which was partially countered by revenue gains in Silpada, improving 7%, while active representatives fell 8.0%.

The beauty product maker’s revenues in Western Europe, Middle East and Africa surged 13.0% year over year, elevated by an 8.0% growth in active representatives and 3% rise in units. U.K revenue grew 2% while South Africa delivered a strong 52% growth. Turkey grew 1%.

Macroeconomic pressures continued to hamper Central and Eastern Europe revenue, which still managed to record a 5% growth in revenues in the quarter despite a 2% fall in unit volume. The region marked a 1.0% decline in active representatives.

The Asia-Pacific division witnessed a decrease of 5.0% in revenues, attributable to a sizeable 10.0% fall in units sold. Active representatives also declined 14.0% during the quarter. China proved to be a major disappointment with revenues sliding 282.0% during the quarter. However, Philippines mitigated the fall in revenue to a small extent by reporting an increase of 7%.

Margin Contraction

Avon’s adjusted gross margin fell 30 basis points year over year to 64.4% as favorable currency impact and improved pricing partially offset by higher product cost and an adverse product mix. Operating profit also jumped 5.8% while operating margin contracted 30 basis points to 11.5%. Lower gross margin contributed to the decrease.

Other Financial Details

The leading global beauty company exited the quarter with cash and cash equivalents of $1,011.0 million, long-term debt of $2,417.3 million, and shareholders’ equity of $2,038.3 million.

The company provided cash from operations of $88 million in the six months ended June 30, 2011 versus $232 million of cash from operating activities in the same period last year. The company expended $144.5 million in capital expenditure for the quarter.

Guidance

Riding on the success of the second quarter, the company noted that strong field programs should result in mid single-digit constant dollar revenue growth for the rest of fiscal 2011. The company also anticipates operating margin to expand in the second half of fiscal 2011, triggered by higher gross margins and revenue.

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.

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).

Avoncurrently retains a Zacks #2 Rank, which translates into a short-term Hold rating. Our long-term recommendation on the stock is Neutral.

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