Besieged Avon Posts Q4 Loss, Stock Sees Relief Rally

by Trefis Team
Avon Products
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Avon Products (NYSE:AVP) recently announced its fourth quarter results and posted weak sales and compressed margins, leading to a net loss for the quarter. Sales declined as the direct selling company sold 2% fewer units with number of sales representatives shrinking by 3%. The bottom-line also suffered with commodity cost pressures and inventory-related charges in Brazil. The rising silver prices also negatively impacted the sales and margins of the 2010-acquired Silpada Designs.

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

Another Quarter of Missed Targets

Despite Avon Products’ efforts to revive business and arrest its sales and earnings decline, it posted a loss last quarter. Fourth quarter sales declined 4% (y/y) as unit sales declined by 2% and the number of sales representatives shrank by 3%. The bottom-line also suffered as gross margin declined by 70 basis points because of commodity cost pressures and inventory-related charges in Brazil and operating margin was 400 basis points worse than the prior-year quarter.

As a result, the overall operating margin was Avon declined by 230 bps in 2011 as sales were almost flat. Higher commodity costs continued to remain a concern  and it also had to mark down the value of a silver jewelry company acquired in 2010.

Prior to this, Avon posted a disappointing Q3 in which it missed its sales and earnings targets by a wide margin and withdrew its full-year guidance. Avon’s recovery has also been constrained by its SEC investigation for possible violation of the Foreign Corrupt Practices Act.

2012, A Transition Year

Avon is taking on 2012 as a “year of transition” and is planning to focus on improving sales, cutting costs and cash generation. It is, however, not planning for margin recovery. The company is still in the process of conducting an full reassessment of its long-term business plan and is likely to update the investors after getting the new CEO.

Despite the losses, the stock picked up 10% after the announcement of results, perhaps because the investors had been preparing for worse. The Avon stock had already lost significant value since the disclosure of an SEC investigation and tanked by another 15% soon after announcing poor Q3 results fraught with sales losses and business disruptions. The appointment of a new CEO and developments towards the completion of SEC investigations could support Avon’s stock price in the near term.

We are in the process of revising our $18 Trefis price estimate for Avon stock.

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