Avon Products (AVP, Financial) has been sailing through troubled waters for quite some time; however, the third-quarter numbers reflect its improving fundamentals. On a year-over-year basis, the revenue was down considerably, which was mainly on account of fluctuation in the dollar. But on the bright side, Avon turned profits from a period of loss a year ago with year-over-year improvement in margins, which was even better than the consensus estimate. Although in terms of actual performance, the company has to cover significant ground, but improving profitability certainly projects a ray of hope for better prospects ahead.
A closer look at the company's business and prospects
During the quarter, a weak Brazilian economy weighed on its performance in Latin America while other regions including Europe, the Middle East and Africa did pretty well. The Brazilian economy did not recover from its weakness even after the World Cup, which was contrary to expectations and consequently the consumer spending also diminished. However, from a long-term perspective the company anticipates better results for Brazil, which in fact is its largest market and Latin America is its most profitable region.
Considering the present market conditions Avon has various new product initiatives in the pipeline to boost its growth. And with all this in mind the company is positive about Brazil for the fourth quarter, yet it will be a matter of time to call it an actual turnaround.
The company does have some bright prospects in the days to come. In fact in the third quarter itself, on a constant dollar basis its revenue increased marginally, which is a good sign. It is also confident about regions such as North America, which according to the management remains on track for profitability in next fiscal. Further in this direction, it is improving its product mix, pricing and merchandising execution, which has started yielding strong results.
In addition, the company also revamped its e-commerce structure with the re-launch of avon.com. This provides Avon immense opportunity to innovate its business by offering a more contemporary social selling model. Apart from this, the company is also looking for ways to innovate. By 2015, it plans to introduce its consumer ecommerce model in the UK as well and gradually in all key markets in the days ahead.
Conclusion
Going forward, Avon is exploring new opportunities for additional cost savings, which will further improve its profitability and boost its growth. Considering all the above facts, its prospects seems to be good but at the same time it has various headwinds in markets such as Brazil and North America among others. Therefore to be on the safe side investors must have a cautious outlook towards this stock.
