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Will Avon’s (AVP) Transformation Plan Aid a Turnaround?

Zacks

Avon Products, Inc. AVP is out of investors’ good books for a while now as the company is grappling with weak Representatives growth for the last few quarters. In fact, this has largely impacted the company’s top line, which lagged estimates in five of the trailing seven quarters. The company has also missed earnings estimates in eight of the last 11 quarters.

Dismal surprise history largely weighed on this Zacks Rank #4 (Sell) company’s price performance. In the past three months, the stock has plunged 44.7%, wider than the industry’s 7.4% decline.



Reasons Behind the Dismal Performance

Avon has been witnessing sluggish Active and Ending Representatives for quite a while now. In first-quarter 2018, Active Representatives decreased year over year in all of the company's four segments, while Ending Representatives fell in all the segments except Europe, Middle East & Africa.

Furthermore, the top line was impacted by decline in Active Representatives, mainly in Brazil and Mexico, coupled with challenges in key markets, particularly in Brazil. In fact, management still expects intense competitive environment in Brazil to adversely impact pricing despite the developing economy.

We note that Active Representatives fell 2%, 3% and 3% in the fourth, third and second quarters of 2017. Although Ending Representatives remained flat in the fourth quarter, it declined 2% in both the third and second quarters of 2017.

In addition, gross margin contracted 280 basis points (bps) in first-quarter 2018 due to higher supply-chain costs. Notably, gross margin included a 310 bps negative impact from the adoption of the new revenue standard.

As Avon is a cosmetics retailer and operates in a consumer centric market, it has to resonate well with changes in consumer preferences and spending patterns for beauty products. Failure in predicting consumer preferences might result in loss of market share and profitability. Additionally, material shifts in market demand for a product for any reason may result in increased inventory levels, which might lead to selling goods at lower prices. This, in turn, is likely to ultimately hurt the company’s top and bottom line.

Avon too faces competition from various products and product lines in both domestic and international markets.

Is Transformation Plan a Boon?

Avon’s continued progress on Transformation Plan is noteworthy. The plan mainly focuses on investing for growth, enhancing cost structure and improving financial flexibility. In this regard, the company has witnessed significant progress compared with its targets of enhancing cost structure and improving financial resilience. Notably, the company has completed the second year of its three-year Transformation Plan, which surpassed the cost-saving target of $230 million, realizing above $250 million in 2017.

In 2018, Avon remains on track to achieve cost savings of $65 million, with roughly $15 million generated in the first quarter. Also, management intends to focus on the business foundations and improve overall performance to attain its savings target. The company anticipates achieving the long-term target of delivering the mid-single-digit constant-dollar revenue growth and low double-digit operating margin.

Additionally, management is committed toward boosting Representatives growth by providing deeper insights and analytics into Representative’s behavior, and requirements to boost experience. Avon also remains encouraged to minimize service disruption along with pilot programs that cover service from end to end.

However, it remains to be seen whether the company’s Transformation Plan and Representatives growth strategies can offset the aforementioned headwinds and reverse stock performance.

Better-Ranked Consumer Staples Stocks

Medifast, Inc. MED has a long-term earnings growth rate of 15% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Archer Daniels Midland Co. ADM has delivered an average positive earnings surprise of 13.3% in the last four quarters. The company carries a Zacks Rank #2 (Buy).

Ollie's Bargain Outlet Holdings, Inc. OLLI is a Zacks #2 Ranked stock and has a long-term earnings growth rate of 23%.

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