Avon Products Inc. (AVP), the world’s largest direct seller of beauty products, is scheduled to release its third-quarter 2010 results on Thursday, October 28 before the market opens. The current Zacks Consensus Estimate for the third quarter of fiscal 2010 is 47 cents a share.
Second Quarter Performance
Avon Products’ adjusted earnings came in at 48 cents per share for the second quarter of fiscal 2010, which topped both the Zacks Consensus Estimate of 45 cents and the year-ago result of 38 cents per share. Second-quarter GAAP earnings more than doubled to $167.6 million from $82.9 million in the year-ago period driven by higher sales and improved margins.
Avon’s total revenue increased 8.1% year over year to $2,679 million, beating the Zacks Consensus Estimate of $2,650 million. The growth was primarily attributable to a 6% benefit from price/mix, a 1% increase in units sold and another 1% benefit from favorable foreign currency translations.
Agreement of Analysts
In the last 7 days there has been no revision in the estimates by the analysts in either direction for the third quarter of fiscal 2010. For fiscal 2010, the Zacks Consensus Estimate increased as 2 out of 15 analysts revised their estimates upward.
In the last 30 days, out of the 15 analysts covering the stock, 1 analyst slashed the estimate for the third quarter of fiscal 2010, while none of the analysts moved in the upward direction. However, estimate revision by analysts for fiscal 2010 reveals a contrasting situation with 7 analysts out of 15 remaining buoyant and revising their estimates upward while none moving in the opposite direction.
Magnitude of Estimate Revisions
As there has been no change in estimates by analysts in the past week, the Zacks Consensus Estimate for the third quarter of fiscal 2010 remains stable at 47 cents a share. Taking into consideration the analyst revision, for fiscal 2010, the Zacks Consensus Estimate increased by 1 cent a share to $2.02 in the last 7 days.
With minimal impact from 1 analyst estimate revision in the downward direction for the third quarter of fiscal 2010, in the last 30 days, the Zacks Consensus Estimate remains at 47 cents a share. However, taking into effect analysts’ positive bias toward fiscal 2010, the Zacks Consensus Estimate increased by 1 cent a share to $2.02 in the last 30 days.
Analyst Opinion
Analysts anticipate that Latin America, Central & Eastern Europe and Western Europe, Middle East and Africa should continue to deliver solid revenue growth going forward. North America should also benefit from the Silpada acquisition.
Surprise History
Earnings surprise history depicts a positive trend in the last four quarters. The company has consistently delivered positive surprises in the trailing four quarters with a minimum of 1.5% to a maximum of 7.7%. On average, the earnings surprise was a positive 4.7%.
Based on the current flow and positive earnings revision inclination by analysts, we expect the company to sustain the positive trend in the forthcoming quarter.
Our Recommendation
Avon Products is a leading global beauty company. As the world’slargest direct seller of beauty and related products, the company markets its products to women in over 100 countries through 6.2 million independent sales representatives. The company also derives a substantial portion of its revenue from high-growth emerging markets, which offers a significant future upside potential.
Avon is in the midst of a multi-year restructuring program that primarily accelerates investments toward targeted growth opportunities, streamlines worldwide manufacturing operations, improves cost effectiveness of administrative operations and enhances organizational effectiveness. The restructuring program is expected to deliver annualized savings of more than $430 million when fully implemented by 2012.
The North American market continues to remain sluggish with sales falling 6.0% in the second quarter of 2010. Moreover, the company’s initiatives to change the product mix and reposition the business in the U.S. market, via increased advertising and promotional activities, will require significant expenditure. This is likely to undermine Avon’s overall operating performance, moving forward.
Avon faces competition from various products and product lines, both domestically and internationally. The beauty and beauty-related products industry is highly competitive and the number of competitors and degree of competition in this industry vary widely across countries.
Worldwide, Avon competes against products sold to consumers by other direct-selling and direct-sales companies and through the Internet and those sold in the mass market and by prestige retail channels.
Avon’s shares maintain a Zacks #2 Rank, which translates into a short-term Buy recommendation. Our long-term recommendation for the stock remains Neutral.
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