--Avon posts first-quarter loss on charges; adjusted earnings
beat Wall Street expectations
--Results improved in Latin America and EMEA, but remain
challenged in North America, Asia
--Shares up 61% since the start of the year
(Updates with comments from conference call, analyst comments,
updated stock quote.)
By Anna Prior
Avon Products Inc. (AVP) posted another quarter of
better-than-expected adjusted profit as the door-to-door cosmetics
vendor continues on its turnaround path. But signs of weakness
remain in key regions, including North America and Asia.
"We continue to see signs of stabilization and we are making
early progress in our cost savings efforts, but there remains a lot
of work to be done across our businesses," Chief Executive Sheri
McCoy said.
Results in Latin America and the Europe, Middle East and Africa
region showed signs of stabilization, including an 11% rise in
revenue in Brazil in constant dollars and a better-than-expected
quarter for Mexico, which posted a 3% rise in revenue in constant
dollars.
But declining revenue in the U.S. remained a drain on the
overall business, , Ms. McCoy said Tuesday on a call with analysts
and investors, adding the company needs to focus on strengthening
the brand and improving its marketing and merchandising, among
other things.
Shares rose 4.1% to $23.16 in recent trading, as adjusted
earnings beat Wall Street estimates and adjusted operating margin
improved. The stock is up 7.4% in the last 12 months.
Looking ahead, the company expects similar trends in overall
sales in the second-quarter. Chief Financial Officer Kimberly Ross
said adjusted operating margins in the current quarter should be up
from the year-ago period.
However, due to one-time items boosting margin expansion in the
latest period, she added that margin growth will be at a "much more
modest rate" than in the first-quarter and the company expects the
rate of change to slow for the remainder of the year.
Avon has struggled in recent years with declining sales in the
U.S., China and other important overseas markets, and the company
continues to deal with a long-running federal probe into
allegations of bribery of officials overseas. But its latest
turnaround efforts and two consecutive quarters of
better-than-expected results have led to a 61% surge in its shares
since the start of the year.
In the latest quarter, Avon spent less on legal fees related to
the federal investigation than the year-ago period, but "it is
going to take time for us to get resolution," Ms. McCoy said.
The company is reassessing its long-range business plan, and
earlier this month said it will cut its global headcount by more
than 400, restructure or close certain operations in Europe, Middle
East and Africa, and exit Ireland as part of a broader plan to save
costs and stabilize results in the near term.
Avon characterized those actions as a bid to take the focus off
certain smaller, underperforming markets and instead concentrate on
high priority markets, with the moves bringing the company's total
cost savings to about $115 million to $120 million on an annual
basis, or about 29% to 30% of Avon's target.
Those moves come in addition to the elimination of 1,500
positions and exiting the South Korea and Vietnam markets, plans
which the company announced in December.
While some analysts applauded the turnaround moves and the
latest quarters results, others remained skeptical.
"All Avon showed yet again this quarter, is that it can cut
spending and not grow," said Bernstein analyst Ali Dibadj. "I'm not
convinced that's a winning formula long-term, although it might get
the stock to go up in the short-term."
Weakening results in North America and China led Wells Fargo's
Tim Conder to "question management's strategy in those key
markets," he said in a note to clients.
For the latest period, Avon reported a quarterly loss of $13.7
million, or three cents a share, compared with a year-earlier
profit of $26.5 million, or six cents a share. Excluding
restructuring charges, a one-time charge to the devaluation of
Venezuelan currency, and other items, earnings totaled 26 cents a
share.
Total revenue fell 3.6% to $2.48 billion.
Analysts polled by Thomson Reuters recently forecast earnings of
14 cents a share on $2.51 billion in sales.
Adjusted operating margin improved to 8.3% from 3.8% a year
earlier, due to gross margin improvement, lower advertising
expenses primarily in Brazil, and lower professional fees
associated with federal corruption probe.
Sales in the main beauty business fell 5% to $1.77 billion.
Sales in Latin America--which accounts for the bulk of the
company's business--were flat at $1.14 billion and rose 7% on a
constant currency basis. North America revenue declined 15%, while
China revenue fell 30%, or 31% in constant dollars as the market
experienced operational challenges, including weaker service
levels.
Last week, the company said chairman and longtime board member
Fred Hassan resigned, continuing a leadership turnover at the
company one year into Chief Executive Sheri McCoy's tenure. Avon
named current board member Douglas Conant as its new chairman,
effective immediately.
--Serena Ng contributed to this article.
Write to Anna Prior at anna.prior@dowjones.com
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