Avon Pre-Earnings: Improving Latin America And EMEA Markets Could Offset Weakness In North America And Asia

Avon Products (NYSE:AVP) is scheduled to report Q3FY14 results on October 30th. Year to date, sales for the struggling cosmetics manufacturer declined nearly 12.5% compared to H1FY13 to $4.37 billion. Additionally, margins have spiraled down as the company failed to contain costs in a declining sales environment. Gross margins in H1FY14 decreased nearly 3% year on year to 59.6%. Operating margins witnessed a sharper decline, falling from 7.5% in H1FY13 to 1% in H1FY14, as investments into advertising and marketing campaigns failed to deliver on sales.

For the upcoming quarter, sales are likely to continue declining on a year on year basis. Q3FY13 sales for Avon were $2.32 billion, and consensus revenue estimates for Q3FY14 stand 7% lower on a year on year basis. Additionally, the departure of its CFO Kimberly Ross could have substantial impact on margins from any disruption in strategy or financial planning, particularly in the domestic North American market.

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LatAm and EMEA In Focus

Last quarter, Avon failed to capitalize on the huge inflow of passengers for the FIFA World Cup in Brazil. The company underestimated product demand during the World Cup and stocked lower inventory levels and had less on-field representatives to cater to the demand. In H1FY14, sales from Latin America (LatAm) declined 12% on a year-on-year basis, with the region accounting for about 48.5% of total first half sales. Constant currency sales, which excludes the impact of currency fluctuations, increased 4% on a similar basis and highlight the strength of the Latin American market for Avon.

Similarly, the Europe, Middle East and Africa (EMEA) market showed signs of recovery last quarter. The EMEA region accounts for nearly 30% of total Avon sales, and regional sales declined 7% year on year in H1FY14. However, sales last quarter posted a growth rate of 2% over Q2FY13, driven by a strong recovery in the U.K., which posted a 11% growth in reported revenues. Avon’s change in strategy and representative training programs have helped aid a strong recovery in the U.K last quarter, and the company intends to roll-out similar programs across its geographic portfolio.

North America, Asia To Drag Down Sales

While LatAm and EMEA have shown encouraging signs of a recovery for Avon, its North America and Asia markets continue to trim any gains from the former markets. The domestic North American market witnessed a 21% decline in sales due to increasing representative attrition. Sales in the Asia-Pacific market contracted 15%, impacted by depreciating local currencies and weak product consumption. For the upcoming quarter, we expect this trend of double-digit declines in North America and Asia to weigh on overall sales and margins. Additionally, the departure of its CFO and the transition of responsibilities to Mr. Robert Loughran could multiply Avon’s problems with the North American market.

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