AVP Avon Products Inc

Avon Products Inc. (AVP) recently posted third-quarter 2011 adjusted earnings of 38 cents a share, missing the Zacks Consensus Estimate of 46 cents a share and slipped 7.3% from the year-ago earnings of 41 cents a share.

On a reported basis, including one-time items, earnings remained flat at 38 cents per share compared with the year-ago quarter.

Total sales of the company rose 5% year over year to $2,706.7 million compared with $2,580.1 million a year ago. Total revenue also missed the Zacks Consensus Estimate of $2,840 million.

The company’s beauty product sales increased 8%, driven by growth of 12% in fragrance, 9% in color, 2% in skincare and 6% in personal care.

Sales by Region

Avon delivered 11% revenue growth in Latin America, primarily driven by an increase of 17% in Mexico, 22% in Venezuela and 5% in Brazil.  Units sold decreased 4% during the quarter, while Active representatives grew 3%.

In North America, sales decreased 7% year over year, down by 8% in units sold, while active representatives fell 9%.

The beauty product maker’s revenues in Western Europe, Middle East and Africa jumped 9% year over year, and spiked 9% and 29% in U.K. and South Africa, respectively.  Avon registered a 3% growth in active representatives, while units sold inched down 1% during the quarter. Revenue in Turkey declined 6%.

Macroeconomic pressures continued to hamper Central and Eastern Europe revenue, which still managed to record a 7% growth in revenues in the quarter despite a 4% fall in unit volume. The region marked a 1% rise in active representatives.

The Asia-Pacific division witnessed a 1% increase in revenues. The region marked 6% decline in Active representatives and 9% fall in units sold. Revenues in China went down 6% during the quarter, while Philippines marked an increase of 2% in revenue.

Margin Contraction

Avon’s adjusted gross margin fell 60 basis points year over year to 64% as favorable currency impact and improved pricing was more than offset by higher product cost. Operating profit reflected an increase of 4%, while operating margin contracted 20 basis points to 10.3% attributable to lower gross margin.

Other Financial Details

The leading global beauty company exited the quarter with cash and cash equivalents of $988.2 million, long-term debt of $2,464.8 million, and shareholders’ equity of $1,843.7 million.

The company provided cash from operations of $234 million in the nine-month period ended September 30, 2011 versus $312 million of cash from operating activities in the same period last year. The company expended $197.4 million in capital expenditure.

Guidance Rolled Back

Battered by the wretched third-quarter performance and macroeconomic pressures, the company rolled back its earlier forecast. It no longer expects revenues to increase in mid-single digit in fiscal 2011 with an expansion of 50 to 70 basis points in operating margin.

Avon Products is a leading global beauty company, and as the world's largest direct seller of beauty and related products, targets women consumers in over 100 countries through 6.5 million independent sales representatives. The company also derives a substantial portion of its revenue from high-growth emerging markets, offering a significant future upside potential.

Worldwide, Avon competes against products sold to consumers by other direct-selling and direct-sales companies and through the Internet and against products sold in the mass market and through prestige retail channels. The company competes head-to head with Revlon Inc. (REV).

Avoncurrently retains a Zacks #4 Rank, which translates into a short-term Sell rating. Our long-term recommendation on the stock is Neutral.

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