Avon Products’ (AVP, Financial) tryst with multi-level-marketing hasn’t offered anything to cheer about. During the past year, the shares have declined close to 50% and its first quarter fiscal 2015 results were stung hard by the negative impact of currency translations. Let’s take a look at the underlying business and see what it holds for investors.
First quarter recap
- Consolidated sales on constant currency basis moved up 1% year-over-year but this was hit hard by negative impact currency movements of 19%. As a result, the sales declined 18% year over year, with declines registered in almost all major geographies. Total revenue came in at $1,794.2 million, missing analysts’ expectations by $40 million.
- Fashion & Home and Beauty sales declined 17% and 19% year over year, respectively. However, on constant dollar terms, both registered year over year gains of 3%.
- The global beauty company witnessed a 2% year over year decline in total units and 1% year over year decline in active representatives.
- Average orders were up 2% year over year on the back of 3% in price/mix driven by higher prices in regions with high inflation like Venezuela and Argentina.
- Adjusted gross margin contracted 10 basis points, or bps, to 61.4% as a result of negative impact of currency fluctuations.
- Adjusted earnings registered year over year decline of over 66% and came in at $.04 per share, missing analysts’ expectations of $0.07 per share. However, point to note is that Forex translations negatively impacted EPS by $0.13.
- Despite the muted results, the company declared dividend of $0.06/share, representing forward yield of 2.77%.
- Avon exited the first quarter with cash and cash equivalents of $668.9 million versus long-term debt (excluding current maturities) of $2,208.2 million and shareholders’ equity of $12.7 million.
Fixing the problem
First is to ensure active representatives growth. In 8 out of 12 markets, the company is slowly seeing growth in active representatives. In addition, for organic and inorganic growth, Avon is keeping an eye on the geographic portfolio and will focus on investments on the areas with the best growth potential, going forward.
Second is finding incremental cost savings and investing for growth. The company will be reviewing its cost structure, and improve on cutting costs based on what really is needed to run the company, including rightsizing the business for the future.
Third is assessment and evaluation of capital structure.
Fourth is global footprint, because the same is a long-term strategic advantage. However, the current Forex translations have created opportunities to improve the business model further so that it can become a long-term growth driver.
Outlook for fiscal 2015
The global beauty products company expects that the negative impact of currency translations will be a major headwind for the current fiscal. For the fiscal 2015, Avon expects that foreign currency translation will decrease 17% from revenue growth. However, on constant currency terms, the management expects revenues to inch up modestly on year over year basis.
In addition, as a result of Industrial Production Tax, or IPT, law on cosmetics introduced in Brazil, the operating margin will contract by 50 bps year over year. Overall, as a result of IPT and Forex headwinds, operating income, in dollar terms, is expected to decline 200 basis points year over year.
Final words
Avon has been struggling and the Forex translation headwinds have only added to its woes. Moreover, the negative impact of forex translations will weigh in heavily on growth in fiscal 2015. The company has posted negative earnings surprises during the last four quarters. For the next five years analysts expect growth at a miniscule CAGR of 3.80%. Forward P/E is pegged at 12.8
For the moment, I would suggest staying away from this stock and invest in Estée Lauder (EL, Financial) instead, which I had recently covered.
