Avon Products (NYSE:AVP) reported another quarter of decreased sales, with Q1FY14 sales shrinking 12% on a year-on-year basis. The company reported net sales of $2,183 million for the quarter, compared to $2,484 million in Q1FY13. Revenues declined across all operating geographies for Avon, with year-on-year declines of 28% and 20% in North America and Asia-Pacific. Avon’s largest market, Latin America, reported a 7% decline in reported revenues. However, the region posted a 7% growth in constant currency revenues for the quarter, indicating a 14% currency headwind.
In addition to a declining top line, Avon’s margins continued to contract. The adjusted gross margins for the company contracted 120 basis points year to year to 61.5%, due largely to unfavorable currency movements Although revenues declined 12% on a year-on-year basis, Avon’s raw material costs declined only 2%, leading to a gross margin contraction. Currency effects and negative operating leverage led to a 240 basis point decrease year to year in the adjusted operating margin, which fell to 6.1%. Avon posted a net loss of $168 million this quarter, compared to a $14 million loss in Q1FY13.
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Weak North American, Asia-Pacific Operations Should Drag Down Fiscal 2014 Sales
In the first quarter of fiscal 2014, the number of active representatives for the company decreased by 4%. This reduction in Avon’s rep count resulted in lower unit sales, down 6% for the quarter. The North American region witnessed an 18% decline in active representatives, impacted by recruitment challenges. This resulted in a 25% decline in unit sales for Avon North America. Going forward, we expect further decline in the the active representative count for the company.
The company offset most of the deleverage with cost reduction actions over the past two quarters despite falling sales. Going forward, Avon expects to streamline its operations further in order to get all processes such as finance, supply chain, sales and marketing etc. into working as a cohesive unit. On a longer term, these processes are expected to drive the company towards its target of double-digit margins.
Similarly, Asia-Pacific continued to remain a weak link for the company. Constant dollar revenues were down 10% this quarter, primarily due to an 8% decline in representatives. China’s constant dollar revenues declined 42% this quarter, impacted by lower number of beauty boutiques. The company expects results from Asia-Pacific to remain soft in the near term. We expect revenues as well as margins to decline in the Asia-Pacific region for Avon in fiscal 2014.