Avon Products (AVP, Financial), an organization that offers beauty care products and cosmetics to customers, has been a disappointing stock to hold for investors. A rumored takeover bid sent shares flying a few weeks ago; however, the rumors soon turned out to be baseless, sending the stock down again. The company has been struggling due to reasons like strengthening U.S. dollar, and its recent quarter reflects its misery.
Struggling to grow
Revenues for Avon Products decreased by 18% to $1.8 billion but increased 1% on constant currency basis, driven by strong growth in Europe, the Middle East and Africa. Total units decreased 2%, driven by a decline in North America. Price/mix was up 3% during the quarter, aided by pricing in markets experiencing high inflation.
Gross margin was 60.6%, up 440 basis points while adjusted gross margin was 61.4%, down 10 basis points, primarily due to the unfavorable impact of foreign exchange, partially offset by lower supply chain costs. Although the company is facing many headwinds, it's making efforts to fix the problems.
In 8 out of 12 markets, the company is slowly witnessing appraisal in its active representatives. Also, for organic and inorganic growth, Avon will focus on investments in the areas with the best growth potential, going forward. In addition, the company is witnessing growing cost savings and is using the money to propel future growth.
The negatives
Brazil's serious monetary situation hosed Avon's sales in 2014. The organization generates more than 50% of its revenue from Latin America and, inside of the Latin American area, Brazil is Avon's single biggest market. Brazil is the third-biggest magnificence market on the planet. This market saw a 10% yearly development rate in the most recent 17 years, up until 2013 when development backed off to 4.9%. The steep drop in growth will damage Avon’s sales and is a great headwind for the company in the long-run. Avon’s is over reliant on the Brazilian economy and the company’s near term performance depends on its revenue generating ability from Brazil. Hence, I reckon the company will struggle due to the weakening of the Brazilian economy.
Despite the company’s woes, it has managed to sustain its dividend. The company recently initiated a quarterly dividend of $0.06 per share. Although sustaining dividend is good news for investors, they shouldn’t buy into Avon just because of its dividend yield. The company faces many headwinds going forward and a minor dividend increase will not make up for it.
Conclusion
Avon has been struggling for quite some time now. Although the company has made several efforts to fix its problems, it faces many headwinds going forward. The company’s over reliance on Brazil will backfire as the country’s economic growth is expected to slow down considerably. Also, despite a massive drop in valuation, Avon still isn’t worth buying given the risks. Hence, I think investors will be better off staying away from Avon Products.
