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Avon (AVP) Slips to Loss in Q1, Alters Reporting Segments

Avon Products Inc. AVP reported adjusted loss per share continuing operations of 7 cents for first-quarter 2016, reflecting a marked deterioration from earnings of 3 cents per share in the year-ago quarter. The Zacks Consensus Earnings Estimate was 2 cents per share.

Further, on a reported basis, the company posted a loss of 36 cents per share, wider than a loss of 33 cents per share a year ago.

In its first-quarter release, Avon discussed some of the changes it has made to its reporting methods. First, Avon deconsolidated its Venezuelan operations from its business as of Mar 31, 2016, following which these form part of the company’s “Other operating segments and business activities.”

Second, the company changed its segment reporting to keep track with the realigned operating model. It will now present segment performance under the Europe, Middle East & Africa; South Latin America; North Latin America; and Asia Pacific segments. Additionally, it has created a segment called “Other operating segments and business activities,” which will include results of the deconsolidated Venezuelan operations, the Liz Earle business that was sold in Jul 2015, royalties for using the Avon name and trademarks in other countries and product sales to the North American business.

 Finally, Avon introduced a metric called “Change in Ending Representatives,” which it believes can be an essential revenue performance indicator.

Deeper Insight

Total revenue plunged 16% year over year to $1,306.5 million but surpassed the Zacks Consensus Estimate of $1,282 million. On a constant currency basis, total revenue improved 3%, net of the impact of Liz Earle’s divestiture that took place in Jul 2015.

Active Representatives dipped 1% year over year as improvement in Europe, Middle East & Africa, were nullified by decreases in other segments, in particular South Latin America. Average orders were up 3% due to an increase in all reportable segments stemming from better prices. Additionally, Ending Representatives jumped 2% backed by growth in Europe, Middle East & Africa, and more importantly Russia and South Africa.

Adjusted gross margin contracted 130 basis points (bps) year over year to 60.3%, mainly due to negative currency effects, negated by improved price/mix and lower supply chain expenses.

Owing to the same factors along with the impact of the IPI tax in Brazil, adjusted operating margin shriveled 230 bps to 4.2% in the quarter.

Segment Performance

Avon’s revenues of $520.4 million in Europe, the Middle East and Africa declined 2% year over year. However, on a currency neutral basis, revenues rose 11%, mainly driven by a 7% increase in Active Representatives and a 4% rise in average orders. Growth in Active Representatives was mainly backed by strength in Russia, while average orders increased in both Russia and U.K. Price/mix in the region went up 4%, while units sold rose 7%. Ending Representatives grew 8%.

Revenues in South Latin America slumped 28% year over year to $426.4 million and dipped 2% on a constant-dollar basis, impacted by a reduction in Active Representatives and the IPI tax in Brazil, partly offset by higher average orders. Units sold were down 11%, Active Representatives slipped 3%, and Ending Representatives fell 1%, while price/mix rose 9%.

North Latin America reported revenue decline of 11% year over year to $204.7 million, while the same increased 2% on a constant-dollar basis. Revenue benefited from a 6% rise in average orders and price/mix each, offset by a 4% decline in Active Representatives, 1% fall in Ending Representatives and 4% decline in units sold.

The Asia-Pacific division’s revenues fell 17% to $136.7 million and decreased 10% in constant dollars. The decline was due to lower revenues in most markets, with China leading the way. Also, a fall in Active Representatives contributed largely to the decline. During the quarter, Active Representatives were down 10%, Ending Representatives fell 4%, units sold declined 8% and price/mix slipped 2%.

Financial Details

Avon exited the quarter with cash and cash equivalents of $753.5 million, long-term debt of $2,145 million, and shareholders’ deficit of $878.8 million.

Zacks Rank

Avon currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry are The Estée Lauder Companies Inc. EL and Nu Skin Enterprises Inc. NUS, each with a Zacks Rank #2 (Buy). Another stock in the related industry worth considering is Sally Beauty Holdings Inc. SBH, also carrying a Zacks Rank #2.

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