Avon Earnings Point to Serious Problem

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Avon Products Inc. (NYSE: AVP) reported third-quarter 2013 results before markets opened Thursday morning. The beauty products maker posted a diluted earnings per share (EPS) loss of $0.01 on revenues of $2.32 billion. In the same period a year ago, the company reported EPS of $0.07 on revenues of $2.47 billion. Third-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $0.19 and $2.44 billion in revenues.

CEO Sheri McCoy, who took over in April 2012, said that the third quarter was “tough,” but that “Avon is headed in the right direction.” Down is the right direction? Uh-oh.

Avon’s net sales for the quarter came in at $2.27 billion, down 8% from the same period a year ago. Sales in North America fell 19% and Asia-Pacific sales were down a whopping 22%. None of the company’s regions showed a year-over-year gain.

As we might expect, operating profit also tanked, but even worse than sales, down 38% overall compared with 2012. Operating margins fell 10% in North America and nearly 24% in Asia-Pacific.

In Asia, revenue from China was down 67% in the third quarter. According to the company’s note the decline was due to “declines in unit sales, partly due to the company’s actions intended to reduce inventory levels held by beauty boutiques, which negatively impacted sales.” So, sales were down 67% because sales declined. McCoy is going to have to do better than this if she wants investors to forget Andrea Jung.

Looking at nine-month performance may be a fairer measure of how the company is doing under McCoy’s leadership. Total revenues in the Asia-Pacific region are down 14% in the first nine months of 2013, down 15% in North America, down 2% in Latin America and up 1% in the Europe, Middle East and Africa region.

McCoy blamed “economic headwinds” and “weakness in some parts of our business, particularly North America.” Perhaps McCoy did not notice, but every part of her company’s business was weak. Blaming bad karma will not work for long. Investors are likely to blame her.

Avon shares were down more than 11% in premarket trading Thursday, at $19.85, in the stock’s 52-week range of $13.70 to $24.71. The consensus target price for the shares was around $25.00 before this report.

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