Avon Downgraded to Underperform - Analyst Blog
June 07 2012 - 6:30AM
Zacks
We have downgraded Avon
Products Inc. (AVP), one of the leading global beauty
companies, to ‘Underperform’ after the company posted disappointing
first-quarter 2012 results. Currently, the stock has a Zacks #5
Rank, implying a short-term ‘Strong Sell’ rating.
The company reported a
year-over-year decline in its bottom line along with contraction in
margins for the third consecutive quarter. Avon’s adjusted earnings
of 10 cents per share for the first quarter of fiscal 2012 fell
short of the Zacks Consensus Estimate of 28 cents and plummeted
nearly 73% from the prior-year period.The weak quarterly
performance resulted from increased input costs, higher labour
costs as well as increased operating expenses. Moreover, the
company’s net sales inched down 2% reflecting a fall of 1% in total
units, partially offset by a favourable price mix.
Moreover,Avon’s North American
market continues to remain sluggish with sales falling 4% in the
first quarter of fiscal 2012. We believe the company’s initiatives
to change the product mix and reposition the business in the U.S.
market will involve significant expenditure to support increased
advertising and promotional activities, which may exert pressure on
margins to some extent.
Battered by continuous wretched
quarterly performance and macroeconomic pressures, the company
intends to focus on its top-line growth, cost management and cash
generation with a lower focus on margin recovery.
Further,we believe Avon has missed
the opportunity of reviving itself after Coty Inc. declared its
lack of interest in acquiring Avon given the company’s reluctance
to enter into discussions since the initial offer was made in March
2012.We believe that the combination would have created an iconic
beauty company that would provide new growth opportunities for the
merged entity.
In addition, Avon’s financial
performance may be substantially affected due to its significant
presence in international markets (81% of total revenue in fiscal
2011), which exposes it to unfavourable foreign currency
translations, economic or political instability and other
governmental actions on trade and repatriation of foreign
profits.
Above all,Avon faces competition
from various products and product lines both domestically and
internationally. The beauty and beauty-related products industry is
highly competitive and the number of competitors and degree of
competition in this industry varies widely from country to country.
Globally, Avon competes with products sold to consumers by other
direct-selling and direct-sales companies and through the Internet
and against products sold through the mass market and prestige
retail channels.The company faces stiff competition from
Revlon Inc. (REV).
AVON PRODS INC (AVP): Free Stock Analysis Report
REVLON INC-A (REV): Free Stock Analysis Report
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