Avon Products (NYSE:AVP), the world’s largest direct-selling organization, reported a modest first quarter earnings for the fiscal 2013 on April 30. Total revenues decreased by 4% due to an adverse currency movement since more than 85% of total revenues of the company comes from outside the United States. Calculated on a constant dollar basis, the revenues remained relatively flat at $2.5 billion as total units decreased by 3% and pricing increased by 3% during the quarter.
Beauty products, which contribute more than 70% of the stock’s value, declined by about 5%, or 1% on a constant dollar basis. Revenues were 7% higher in Latin America on a constant dollar basis while Europe, the Middle East & Africa (EMEA region) reported 3% higher revenues year-on-year, largely supported by a 4% increase in the number of active representatives in both these regions. The growth in Latin America and EMEA was offset by a 15% decline in revenues in North America and a 12% decline in Asia-Pacific region, as active representatives declined in both these regions.
Avon Products spent about $20 million on the “$400 million Cost Savings Initiative” in the first quarter, which was in line with our estimates. The company aims to achieve a targeted low double-digit operating margin by 2016 as a result of the restructuring program. As we discussed in our pre-earnings estimates, Avon Products also recognized a loss of $51 million, primarily due to the Venezuelan currency devaluation in February. In addition to this, operating profits were negatively impacted by $13 million to account for the change in Venezuelan currency value.
Home Products Division Supports Top Line From Sliding
Home Products division contributes about 12% to the company’s stock value. The division generated total revenues of $234 million in the first quarter, up 8% year-on-year on a constant dollar basis. This is the only division which reported a positive change as the revenues from Beauty Products and Fashion Products declined by 1% and 3% respectively, on a constant dollar basis. We estimate Home Products division to provide continuous support to the company’s top line over the coming years due to improved pricing and merchandising.
Number Of Active Representatives Increase
The company’s investment in Representative Value Proposition (RVP) has started to bear fruits as the total number of active representatives increased by about 1%, in line with our previous estimates. RVP includes a Sales Leadership program focus on enhanced incentives and optimum discount structure, increased sales campaign frequency, improved commissions and new web enabled e-business tools to improve the earnings opportunity for its representatives. A growing number of representatives is a positive news for the company’s revenue growth as they have a direct positive correlation. The number of representatives rose from 6.2 million in 2009 to 6.5 million in 2010, which resulted in an increase in revenues from $10.2 billion in 2009 to $10.8 billion in 2010. Since then the number of representatives declined to 6.3 million in 2012, resulting in lower overall revenue of $10.5 billion.
We have updated our price estimate for Avon Products to $20.44 to incorporate the latest earnings.