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Avon Lacks Luster: Can Transformation Plan Aid Turnaround?


Avon Products, Inc AVP has been out of investors' favor for quite some time now. The company’s persistent dismal performance can be attributed to weak Active Representatives. Reflecting the struggles of this beauty products retailer, recent records reveal that it has missed earnings and sales estimates for four consecutive quarters now.

Evidently, shares of this Zacks Rank #5 (Strong Sell) company have plunged 62.8% in the past year, significantly wider than the industry’s decline of 7.7%. On the contrary, the broader Consumer Staples sector which is placed at the top 31% (5 out of 16) of the Zacks classified industries, gained 2.8%.

What’s Troubling the Stock?

Avon has been struggling with waning Active Representatives. In the last reported quarter, Active Representatives and Ending Representatives declined across all segments, barring Ending Representatives growth in North Latin America. Active Representatives declined 3% on a year-over-year basis, while Ending Representatives dipped 2% in second-quarter 2017. In fact, results in the quarter were also impacted by strong comparisons with the prior-year quarter.

Further, operating margins were hampered by constant-dollar revenue decline resulting in deleveraged fixed expenses; higher bad debt expense, particularly in Brazil; increased Representative, sales leader and field expenses; elevated transportation costs, mainly in Russia and investments in advertising for product launches. Consequently, management anticipates constant-dollar revenue growth for 2017 to be at the low end of its previous guidance of low-single digits growth.

Meanwhile, Avon is facing macroeconomic headwinds like intense competition from various products and product lines, in both domestic and international markets. All these factors are likely to weigh upon Avon’s performance and dent overall profitability.

Can Avon’s Transformation Plan Revive Its Performance?

The company’s progress on Transformation Plan, which is on track to deliver cost savings goals of $230 million for 2017, is noteworthy.

Avon is now in the second year of its three-year Transformation Plan that was announced in January 2016. The plan mainly focuses on growth investment, cost structure enhancement and improvement of financial flexibility. Crossing the half-way mark of the plan period, the company has witnessed significant progress with its targets of enhancing cost structure and improving financial resilience.

These savings have considerably aided in countering inflation. Additionally, the company anticipates this plan to help it attain long-term goal of delivering low-double digit operating margin and constant-dollar revenue growth in the mid-single digits.

Bottom Line

We believe that Avon’s Transformation Plan will spark a turnaround in the company’s performance, but this might take time. Hence, we suggest that investors should stay away from the stock until the strategies bear favorable results.

Meanwhile, you can opt for some better-ranked stocks from the broader Consumer Staples sector such as The Estee Lauder Companies Inc. EL, Ollie's Bargain Outlet Holdings, Inc. OLLI and Tupperware Brands Corp. TUP.

Estee Lauder, with a long-term earnings growth rate of 12% has delivered average positive earnings surprise of 13.7% in the trailing four quarters. Currently, the stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ollie's Bargain Outlet, with a long-term earnings growth rate of 19.5%, has pulled off average positive earnings surprise of 12.4% in the last four quarters. Also, the stock carries a Zacks Rank #2 (Buy).

Tupperware Brands, a Zacks Rank #2 stock has a long-term earnings growth rate of 12%. Further, the company has reported average positive earnings surprise of 5.7% in the trailing four quarters.

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