Avp



|Avon Products Inc. |AVP - NYSE |$2.25 |

Note: More details to come; changes are highlighted. Except where highlighted, no other sections of this report have been updated.

Reason for Report: FLASH UPDATE: 1Q18 Earnings Release

Prev. Ed.: Apr 4, 2018; 4Q17 Earnings Update

Flash Update [Earnings update in progress; to follow]

On May 3, 2018, Avon Products Inc. reported loss per share in line with estimates in first-quarter 2018 while revenues topped estimates. Results included gains from the new revenue recognition standard adopted in the first quarter of 2018.

Q1 in Detail

Avon posted adjusted loss per share of 2 cents in the first quarter, in line with the Zacks Consensus Estimate. Additionally, it reflected an improvement from a loss of 7 cents per share in the prior-year quarter.

On a reported basis, the company posted loss per share of 6 cents compared with loss per share of 10 cents in the year-ago quarter.

Deeper Insight

Total revenues improved 5% year over year to $1,393.5 million and surpassed the Zacks Consensus Estimate of $1,365 million. On a constant-currency basis, total revenues increased 2%. Results for the quarter include the benefit of the new revenue recognition standard. However, the top line was impacted by lower Active Representatives, mainly in Brazil and Mexico along with challenges in key markets, particularly in Brazil.

However, Active Representatives declined 4% compared with the prior-year quarter, driven by fall in South Latin America and North Latin America. Ending Representatives dipped 1% on account of softness in South Latin America and North Latin America, offset by growth in Europe, Middle East & Africa. Moreover, average orders improved 6% and price/mix rose 5% while total units sold dropped 3%.

Adjusted gross margin contracted 280 basis points (bps) year over year to 58.4%, driven by higher supply-chain costs, partly negated by positive impact from price/mix. Further, gross margin included a 310 bps negative impact from the adoption of the new revenue standard.

Adjusted operating margin expanded 100 bps to 4%. The year-over-year increase was due to lower bad-debt expenses, particularly in Brazil; partly compensated by higher Representative, sales leader and field expenses. It also included a 120 bps positive impact from the new revenue standard.

Segment Performance

Avon’s revenues of $568.4 million in Europe, Middle East & Africa rose 12% year over year. On a currency-neutral basis, revenues improved 2%. Results included 5% gain from the new revenue standard, offset by 1% decline in Active Representatives and lower average order. While price/mix and units sold for the region dipped 1% each, Ending Representatives rose 3%.

Revenues in South Latin America were flat at $497.1 million and improved 4% in constant-dollar, including 9% gain from the new revenue standard. During the quarter, gains from 10% increase in average order and 9% rise in Price/Mix were offset by 6% decline in Active Representatives, 5% fall in units sold and a drop of 3% in Ending Representatives. Further, revenues were impacted by the decline in Brazil, partly negated by growth in Argentina, due to inflationary pricing.

North Latin America’s revenues inched up 1% to $195.6 million and declined 3% in constant-dollars, attributable to 6% fall in Active Representatives, offset by 3% increase in average orders. While price/mix grew 7%, units-sold and Ending Representatives fell 10% and 5%, respectively. Revenues for the segment included 5% gain from the new revenue standard.

The Asia-Pacific division’s revenues declined 2% to $111.4 million and were down 3% in constant dollars, mainly owing to 1% decline in Active Representatives and 2% fall average orders. While price/mix rose 2%, units sold and Ending Representatives dropped 5% and 2%, respectively. During the quarter, Active Representatives were most significantly impacted by declines in Malaysia. Revenues were also impacted by 1% decline due to the adoption of the new revenue standard.

Financial Details

Avon ended first-quarter 2018 with cash and cash equivalents of $772.5 million, long-term debt of $1,629.6 million and total shareholders’ deficit of $756.3 million (excluding non-controlling interests).

MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON AVP.

Portfolio Manager Executive Summary [Note: only highlighted material has been changed]

Avon Products, Inc. (AVP) engages in manufacturing and marketing beauty and related products worldwide. The company markets its merchandise through direct selling and independent representatives as well as through distributors.

Of the seven firms in the Digest group covering the stock, none provided positive rating, four assigned neutral ratings while three firms rendered a negative rating to the stock.

The following is a summarized opinion of the diverse brokerage viewpoints:

Neutral or equivalent outlook (4/7 firms or 57.1%) – Most firms believe that a major turnaround for Avon is still away. Moreover, these firms believe that the direct selling category trends remain pressured as retail-based selling is dominating over customer attention. This is likely to bear an impact on Avon’s results.

However, the company is on track with its Transformation Plan that was announced in Jan 2016 and focuses on investing in growth, enhancing cost structure and improving financial flexibility. These firms also remain hopeful about the company’s long-term targets that should facilitate cash flow improvement, lift margins and drive overall growth.

Apr 4, 2018

Overview [Note: only highlighted material has been changed]

Headquartered in New York City, Avon Products Inc. directly sells cosmetics, fragrances, toiletries, jewelry, and accessories. The company markets globally through nearly 6 million independent sales representatives and is the world’s largest direct seller. The company’s products are classified under the following categories: Beauty, Beauty Plus, Beyond Beauty, and Health and Wellness. Beauty products include cosmetics, fragrances, and toiletries under the brand names of Avon Color, Anew, Skin-So-Soft, and Advance Techniques, among others. Beauty Plus consists of jewelry, watches, apparel and accessories. Beyond Beauty products include home products, gifts and decorative items. Health and Wellness products include vitamins, exercise equipment and other related items.

After exiting North American business, the company changed its segment reporting to keep track with its realigned operating model. It now presents segment performance under four reportable segments: the Europe, Middle East & Africa (EMEA); South Latin America; North Latin America; and Asia Pacific segments. Additionally, the company accounts the results of the deconsolidated Venezuelan operations, the Liz Earle business that was sold in July 2015, royalties for using the Avon name and trademarks in other countries and product sales to the North American business under a new segment called “Other operating segments and business activities.”

Its website is . The company’s fiscal year coincides with the calendar year.

The firms identified the following issues as critical for evaluation of the investment merits of Avon:

|Key Positive Arguments |Key Negative Arguments |

| | |

|Strategic Efforts: Avon outlined some strategic measures focused on |Slowdown in Brazilian Market: The company is hit by the slowdown in growth of |

|accelerating top-line growth, cutting costs and improving working |developing markets, particularly in Brazil which is a major growth driver for |

|capital. |Avon. |

| | |

|Continuous Innovation: Several new products as well as product extensions|Currency Fluctuation: Strengthening of the U.S. dollar against major |

|are always on deck as part of Avon’s continuous innovation initiative. |currencies, such as the euro, pound, Mexican peso and Brazilian real, will have|

|Analysts believe that this tradition gives Avon a competitive advantage. |a negative impact on the company’s top-line growth. |

| | |

|Sales Representative Motivation: New incentives, reward programs and |Avon's Emerging Market Exposure: With emerging markets representing roughly 85%|

|emphasis on sales leadership persistently motivate the company’s sales |of the company's sales and most of its growth, the firms are worried about |

|force. Avon believes its sales force model to be a competitive advantage.|slowing growth as these markets gradually mature and competition intensifies. |

| | |

| |Lower Level of Brand Equity than its HPC Peers: Avon invests more in marketing |

| |support in an effort to strengthen the Avon brand globally. However, the Avon |

| |brand is still inferior in several large markets, such as the United States. |

Apr 4, 2018

Long-Term Growth [Note: only highlighted material has been changed]

The firms believe that Avon has a healthy tradition of continuous product innovation that distinguishes it from peers. Moreover, management has laid down certain strategic measures focusing on accelerating top-line growth, trimming costs and improving working capital. Management is continually looking for scope to ease business issues and direct the company toward growth trajectory.

Additionally, Avon is continuously working on bringing down costs through its three-year Transformation Plan that was announced in January 2016. The plan mainly focuses on investing for growth, enhancing cost structure and improving financial flexibility. In this regard, the company has witnessed significant progress compared with its targets of improving cost structure and financial resilience.

Notably, the company has successfully completed the second year of this plan and is on track to reach its overall cost savings target of $350 million. Moving ahead, management is likely to focus on the business foundations and improve overall performance to attain its savings target. Furthermore, it intends to achieve the long-term target of delivering the mid-single-digit constant-dollar revenue growth and low-double digit operating margin.

Management plans to invest nearly $350 million over a three-year period starting 2016, including $150 million toward media and social selling; and $200 million for service model evolution and information technology. This is mainly aimed at bolstering the overall Representative experience. Avon has also made significant progress in improving balance sheet through refinancing activities and reduced costs by slashing jobs and exiting operations in the underperforming markets.

Additionally, the company is focused on bolstering growth of Active Representatives and remains on track to deliver 1-2% growth in the long term. Though Avon is facing challenges, it is expected to focus on investment in modernizing systems, delivering unique and competitive Representative experience. Further, it aims to provide deeper insights and analytics into Representative’s behavior and requirements to boost experience. The company also remains encouraged to minimize service disruption along with pilot programs that cover service from end to end. These factors along with the company’s progress on its Transformation Plan underscore the fact that it is poised well for sustainable and profitable growth in the long term.

Apr 4, 2018

Target Price/Valuation [Note: only highlighted material has been changed]

|Rating Distribution |

|Positive |0.0%( |

|Neutral |57.1%( |

|Negative |42.9%( |

|Avg. Target Price |$2.71( |

|Highest Target Price |$3.00( |

|Lowest Target Price |$2.00( |

|No. of Analysts with Target Price/Total |7/7 |

Risks associated with the price target primarily include failed new product launches, inability to achieve targeted cost reductions, higher-than-expected advertising and promotional expenditures, further slowdown in consumer spending in the U.S. or abroad, increases in gasoline prices, which can curtail sales activity in the United States, unfavorable changes in the value of the U.S. dollar relative to foreign currencies, and a general decline in consumer product and/or cosmetic stock valuations.

Recent Events [Note: only highlighted material has been changed]

On Feb 15, 2018, Avon posted adjusted earnings from continuing operations of 12 cents per share in the fourth quarter of 2017, beating the Zacks Consensus Estimate of 6 cents. Additionally, it reflected a significant improvement from earnings of 1 cent per share in the prior-year quarter. However, Total revenues remained flat year over year (y/y) at $1,568.8 million but lagged the Zacks Consensus Estimate of $1,592 million.

Revenue [Note: only highlighted material has been changed]

Provided below is a summary of revenue as compiled by Zacks Digest:

|Revenue ($ M) |4Q16A |

|Copy Editor |Rajani Lohia |

|Content Ed. |Rajani Lohia |

|Lead Analyst |Rajani Lohia |

|QCA |Sumit Singh |

|No. of brokers reported/Total brokers | |

|Reason for Update |Flash |

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May 3, 2018

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