Home and Fashion Outperform Makeup Sales for Avon! Huh
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A cosmetics company whose home and fashion division outperforms its makeup division! This may seem like some kind of anomaly, but that was exactly the case with Avon Products (NYSE: AVP) when it came to its average orders in North America during the second quarter of this year. Still, the company's global revenue growth is slowing considerably, causing many worries about how the company can recover and restore investor confidence.
At the closing bell on Thursday, Avon’s stock was trading at $14.45, which was below its 52-week low of $14.82. Its 52-week high is $24.54. The declines are largely due to the results of its second quarter, as well as ongoing developments in the company’s alleged bribing of Chinese officials to sell Avon products.
The company has a new president, Sheri McCoy, and she had this to say about the earnings report: "Avon's second-quarter financial results are not good and they reflect the complex challenges that Avon faces….”
Not good! That’s an understatement, to say the least.
Avon’s profits declined a whopping 70% during the second quarter. Total global revenues were down 9% to $2.6 billion. Sales in every category of its business were down. Sales from its beauty category, which includes cosmetic, fragrances and skincare were down 9% to $1.8 billion. Fashion sales, which include jewelry, apparel, and footwear, were down 10% to $460 million. Home sales were down 12% to $233 million.
Now here’s the kicker. When Avon held its earnings conference call last week, CFO Kimberly Ross said that in North America, fashion and home average orders are outperforming beauty. Mind you that this group includes home products like gift and decorative items, housewares and even nutrition. Ross noted that the reason stemmed from home and fashion products having higher price points, "which is also helping average order."
Something else that caught my attention about the Q2 earnings was the company’s increased investment in brochures. When was the last time you ordered something out of a brochure versus ordering it off of the internet? Given the way to shop is increasingly via the internet, it was odd to me that the company would increase its investment in this antiquated form of advertising. It does offer the brochure online, I must point out.
The company blamed a stronger dollar and falling demand for its cosmetic products around the globe for its weak performance.
Avon’s peer group includes Estee Lauder (NYSE: EL), L’Oreal (NASDAQOTH: LRLCY.PK) and Revlon (NYSE: REV). I looked over some of their fundamentals and found the following. Avon’s earnings per share are in line with these companies. It is $1.36, compared to $2.23 for Estee Lauder, $1.20 for L’Oreal and $1.12 for Revlon. However, it is the decline of Avon’s EPS that gives one pause. It has fallen from $1.86 to an estimated $1.08 over the past five quarters, which indicates its growth rate is declining.
All of Avon’s margins were lower for the second quarter than they were for Q2 2011. Its gross margin is relatively strong at 62.8%, but that is 170 basis points lower than the prior-year quarter. Its operating and net margins were 4.9% and 2.4%, respectively.
One of the headwinds Avon faces may be easing. It relates to the Securities and Exchange Commission (SEC) probing whether or not the company bribed Chinese officials over the sale of its products. The possible violation specifically relates to the Foreign Corrupt Practices Act (FCPA), which prohibits U.S. businesses from paying bribes to officials of foreign governments.
Avon is reportedly in talks with the SEC to resolve the issue, which is some of the best news to come from the company since that dreadful Q2 earnings report.
As I reviewed the earnings news for the world’s largest direct seller of cosmetics, I wondered if Avon execs may be wishing they’d taken Coty up on its offer to buy it earlier this. That offer was for $10.7 billion or $23.25 a share. Coty may be a smaller company, but it is growing and well poised to continue to do so. In fact, the company is planning to go public.
One of the things in Avon’s favor is its dividend, which is $.92, yielding 5.9%. However, even that is in danger as there are concerns that it could be cut next year, which Standard & Poor’s pointed out in a July analysis report. Avon has its work cut out for it to return to profitability and restore investor confidence and trust. McCoy says she is energized and up for the challenge. The question now is will her efforts be enough.
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