Avon Products Earnings Preview: What We’re Watching

by Trefis Team
Avon Products
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Avon Products (NYSE:AVP) will announce its annual results Tuesday as we watch for its progress in arresting the declines in its sales and operating margins, especially after the disappointing Q3 results in which it missed its targets by a wide margin. Last quarter, the company also withdrew its full-year revenue guidance for further review. Avon is under SEC investigation for possible violation of the Foreign Corrupt Practices Act, which has led to further complications in its business recovery. With these adverse developments, the stock tumbled to a new 52-week low in November and picked up slightly later as the company showed some aggressiveness by making top-level management changes. Avon sells its products to the final consumer through direct-selling with an active global sales force of over 6 million sales representatives, and this business model separates it from peers like L’Oreal (PINK:LRLCY), Procter & Gamble (NYSE:PG), Estee Lauder (NYSE:EL) and Unilever (NYSE:UL).

View our detailed analysis for Avon’s stock here

Disappointing Performance in Q3, Missed Targets by Wide Margin and Withdrew Guidance

Avon’s stock had lost significant value since it disclosed that it faced SEC investigations into corruption charges under the Foreign Corrupt Practices Act. And the stock tanked another 15% after it announced poor Q3 results, fraught with sales loss, business disruptions in Brazil and worsening profitability in Europe, Latin America and the U.S. As it missed its Q3 targets by a wide margin, the company also withdrew its revenue guidance for FY 2012 indicating an ongoing full reassessment of its long-term business plan. These developments jolted investor confidence over the management’s ability to stabilize business and restore sales amid weakness and competition in all of its major markets including the U.S. and Brazil.

Management Changes

With waning investor confidence, Avon was under tremendous pressure to revamp its top management. In December, it announced the separation of roles of Chairman and Chief Executive Officer, and has since been looking for a new CEO to succeed the current Chairman-CEO Andrea Jung. It recently also fired its CFO, Charles Cramb, in the wake of SEC investigations. However, there are concerns that Jung’s refusal to leave the company and her plans of staying heavily involved as Executive Chairman might impede Avon’s recovery and will make strategy execution difficult.

In the earnings, we expect operational and financial updates on Avon’s progress in arresting the decline in sales and operating margins as well as the trends in the number of sales representatives and sales per representative, which are the key drivers to the company’s sales.

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