Avon: Zacks’ Bear of the Day Play

Analysts have been cutting their estimates for this door-to-door beauty products seller ahead of its Q3 earnings report due on October 30. Sliding estimates sent the stock back to Zacks Rank # 5 (Strong Sell) last week.

Avon Products (AVPAnalyst Report) is global beauty company, with nearly about $10 billion in annual revenue. The company is the world’s largest direct seller with more than 6 million active independent sales representatives.

Avon products which are available in over 100 countries include color cosmetics, skincare, fragrance, fashion and home products, under brand names like Avon Color, ANEW, Skin-So-Soft and Advance Techniques.

A string of disappointing results and bribery allegations have resulted in a steep decline in the stock price over the past few months. Avon was earlier featured as the “Bear of the Day” on May 6; it’s down about 13% since then.

Disappointing Results

AVP reported its Q2 results on July 31. Total revenue for the quarter declined 13%, while the adjusted gross margin was down 30 basis points from the prior-year quarter. Adjusted net income was $0.20 per share, down from $0.29 per share, for same quarter a year ago and was also short of the Zacks Consensus Estimate of $0.21 per share. This was company’s third miss in the last four quarters.

On October 10, Moody’s downgraded the rating on unsecured notes issued by the company based on “concern that competitive and structural challenges associated with Avon’s direct selling model are creating pressure on representative levels, revenue and cash flow”.

CFO Transition

Last month Avon announced the resignation of CFO Kimberley Ross and appointment of the Corporate Controller as the CFO while the company completes the search for a permanent CFO.

Negative Earnings Estimates Revisions

As a result of worsening outlook for the company, analysts have been revising their estimates lower. Zacks Consensus Estimates for the current and the next year now stand at $0.78 and $0.90 per share, down from $0.81 and $0.97 per share, 30 days ago. Declining estimates sent AVP back to Zacks Rank # 5 last week.

The following chart shows the trend of declining estimates for AVP:

Better Play in the Industry?

Cosmetics industry is currently ranked 248 out of 265 Zacks industries (bottom 6%). There is no stock with Zacks Rank # 1 or #2 in this industry as of now. Given its weak outlook, investors may like to avoid the industry for the time being.

The Bottom Line

Avon’s turnaround efforts do not seem to be working. With poor execution strategy and declining sales force, the outlook does not appear to be brightening anytime soon. Investors should therefore avoid this stock for the time being.

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