Avon Products (NYSE:AVP) will report its fiscal 2013 results on Monday, February 10. In the three quarters reported so far in 2013, revenues were 5.2% lower on a year-on-year basis at $7,316 million. The top line gap widened by 9% on a year-on-year basis during Q3FY13 due to strong executional lapses in its turnaround strategy. Although operating profit for the nine months expanded by 46% compared to a similar period from 2012, the challenges faced in Q3FY13 resulted in a 36% drop in operating income on a year-on-year basis. Year-on-year growth in operating profits during Q1FY13 and Q2FY13 were much stronger, at 141% and 60%.
For the fourth quarter, we have a revenue estimate of $2,995 million compared to $3,000 million in Q4 last fiscal year. However, we could see a sharp correction in our price estimate if the lapses seen in Q3FY13 continue to persist for the company. In addition, we have a GAAP EBIT margin of 7.3% for fiscal 2013, up from 3% seen in fiscal 2012. A contraction in this margin for fiscal 2013 following the challenges faced in Q3FY13 could result to a reduction in our $21 price estimate for Avon Products.
Representative Count In Focus
The company’s total representative base decreased by 3% last quarter with severe employee disruptions in the North American market. This reduction in representative count, primarily in the already struggling North American market, resulted in a 7% drop in unit volumes during Q3FY13. For the nine months, however, the strong performance in Q1FY13 and Q2FY13 offset the weakness in Q3FY13, with constant currency revenues for the three quarters relatively unchanged over a year prior period. Avon’s strength in the Latin American markets led to a 4% reduction in revenues due to currency volatility in emerging markets during the January – September period.
In terms of representative count, we expect to see a further decline in Avon’s base due to the ongoing implementation of its One Simple Sales model, which started in 2011.  The One Simple Sales model resulted in an organizational restructuring by reducing the number of district managers and reassigning existing representatives to new areas. This reduction in headcount and the reorganization of its representative base considerably eroded field health in the U.S. and Canada. A further decline in its total representative count should lead to a downside in constant currency revenues for the company.
Currency Impact Should Be Moderate In Q4FY13; North America, Asia-Pacific Should Continue Underperformance
Avon derives close to 50% of its revenues from the Latin American markets alone, and more than 85% of its overall revenues from International geographies. This exposes the company to significant currency fluctuation risk. In Q3FY13, constant currency and reported revenue growth rates stood at 6% and (-5%) for Latin America, 2% and 0% for EMEA, (-18%) and (-19%) in North America, and (-19%) and (-22%) in the Asia-Pacific region. Currencies in markets of Brazil and Mexico strengthened 1.86% and 0.23% against the U.S. dollar in Q4FY13, compared to a depreciation of 9.22% and 1.22% in the previous three quarters. For Q4FY13, we expect relatively low volatility in emerging market currencies in comparison to the previous quarters.
However, we expect another quarter of very weak numbers from the North American and Asia-Pacific markets. While Avon’s performance within the U.S. is impacted by an organizational restructuring, as stated above, the company’s performance in the Asia Pacific region continues to remain very weak due to operational challenges, resulting in a reduction in representative count. Constant currency revenues from China and Philippines decreased 41% and 4% in the nine months in 2013, primarily due to decrease in units sold. We expect this trend of decreasing constant currency revenues in the North American and Asia-Pacific markets to continue going forward. We expect overall revenues to decrease by 4% on a year-on-year basis to reach $10.31 billion for fiscal 2013.Notes:
- Avon Products Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 2013 [↩]