Avon Products Inc. reported dismal second-quarter 2017 results, wherein both adjusted loss per share and revenues lagged estimates. Results were mainly impacted by strong comparisons with the prior-year quarter.

Consequently, the stock slumped 9.5% in the pre-market trading session, following the release. Overall, Avon’s shares have declined 7.2% in the last three months, underperforming the industry’s growth of 7.1%.

The company posted adjusted loss from continuing operations of 3 cents per share for the second quarter, lagging the Zacks Consensus Estimate of 5 cents. Further, results compared unfavorably with the prior-year earnings per share of 7 cents.

On a reported basis, the company posted loss per share of 12 cents compared with earnings of 7 cents in the year-ago quarter.

Deeper Insight

Total revenue dipped 3% year over year to $1,395.9 million and fell short of the Zacks Consensus Estimate of $1,443.3 million. On a constant currency basis, total revenue declined 4%.

Active Representatives declined 3% compared with the prior-year quarter, while Ending Representatives dipped 2%. Both Active Representatives and Ending Representatives were hurt by decline in all segments, barring Ending Representatives growth in North Latin America. Average orders were down 1% due to decline in Europe, Middle East & Africa (EMEA) and North Latin America, mitigated by growth in South Latin America and flat Asia-Pacific orders. Units Sold dipped 5% due to decline in all segments.

Adjusted gross margin expanded 180 basis points (bps) year over year to 62.4% on the back of favorable price/mix and net positive impact from foreign currency transaction gains and foreign currency translation.

Adjusted operating profit increased 32.9% to $70.1 million, while adjusted operating margin contracted 230 bps to 5%. Operating margin was hampered by constant-dollar revenue decline resulting in deleveraged fixed expenses; higher bad debt expense, particularly in Brazil; increased Representative, sales leader and field expenses; elevated transportation costs, mainly in Russia; and investments in advertising for product launches. This was partly negated by positive impact from currency, improved price/mix and lower incentive compensation plan costs.

Segment Performance

Avon’s revenues of $494.6 million in Europe, the Middle East and Africa slipped 5% year over year. On a currency neutral basis, revenues dipped 6%, mainly driven by a 3% fall in both Active Representatives and average orders. Price/mix in the region went up 2%, while units sold declined 8%. Ending Representatives dipped 1%.

Revenues in South Latin America increased 4% year over year to $558.1 million and remained flat in constant-dollars, mainly owing to 2% growth in average orders, partly negated by 2% decline in Active Representatives. Furthermore, price/mix increased 5%, while units sold were down 5%. Ending Representatives also declined 2%.

North Latin America reported a revenues decline of 7% year over year to $207.8 million, and fell 5% in constant-dollars, due to 2% decline in Active Representatives and 3% fall in average orders. Also, price/mix declined 2% while units sold fell 3%. However, Ending Representatives inched up 1%.

The Asia-Pacific division’s revenues fell 11% to $124.7 million and decreased 7% in constant dollars. The decline was mainly attributed to a 7% decline in Active Representatives. While average orders remained flat, units sold fell 3%, price/mix dropped 4% and Ending Representatives declined 7%.

Financial Details

Avon ended the second quarter with cash and cash equivalents of $633.8 million, long-term debt of $1,873.8 million, and shareholders’ deficit of $853.1 million (excluding non-controlling interests).

Transformation Plan Update

Avon is in the second year of its three-year Transformation Plan that was announced in Jan 2016.  The plan mainly focuses on investing in growth, enhancing cost structure and improving financial flexibility. Crossing the half-way mark of the plan period, the company has witnessed significant progress against its targets of enhancing cost structure and improving financial resilience.

In 2016, the company surpassed cost saving targets, realizing cost savings of roughly $120 million and considerably improved balance sheet as it reduced debt by about $260 million and extended maturity profile.

In 2017, the company targets cost savings of $230 million, including run-rate savings from 2016, along with in-year savings from current year initiatives. The company stated that savings realized through first-half indicate that it is on track with its goals for 2017. These savings have considerably aided in countering inflation.

With significant progress on two factors, the company is now keen on investing in growth by implementing strategies that will aid in strengthening Avon while driving profitable growth. After deliberate evaluation, the company is now focused on putting in key enablers in place. These enablers include delivering a competitive, seamless experience for Representatives; making sure the Representatives have the right product to sell; and ensuring it is expanding in the right geographies.

With regard to investing in growth, management plans to invest nearly $350 million over the three-year period, 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.

Outlook

On the back of second-quarter performance, the company now expects constant-dollar revenue growth for 2017 to be at the low-end of its previously provided guidance range of low-single digits growth. This expectation continues to be based on its previously stated Active Representatives growth of 0–1% in second-half 2017, along with solid innovation pipeline and the effects of the ongoing Transformation Plan. Additionally, the company had earlier projected modest currency tailwinds to aid top-line growth.

Further, the company expects the aforementioned top-line growth and its ongoing cost savings initiatives to result in operating margin expansion. Moreover, the company now anticipates free cash flow to increase from its previous guidance of slightly positive free cash flow. This reflects a $20 million reduction capital expenditure from the previously planned $65 million increase.

Zacks Rank

Avon currently carries a Zacks Rank #3 (Hold). Investors can count on better-ranked stocks in the Cosmetics industry including The Estee Lauder Companies Inc. (EL Quick QuoteEL - Free Report) , Inter Parfums Inc. (IPAR Quick QuoteIPAR - Free Report) and Nu Skin Enterprises Inc. (NUS Quick QuoteNUS - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Estee Lauder has an average positive earnings surprise of 10.9% in the trailing four quarters. The stock, with a long-term EPS growth rate of 12%, has delivered a return of 28.8%  year to date.

Inter Parfums has jumped nearly 7.6% year to date. Moreover, the company has delivered an average positive earnings surprise of 15.6% in the trailing four quarters and has a long-term EPS growth rate of 12.3%.

Nu Skin has grown nearly 30% year to date. The stock has a long-term EPS growth rate of 8.5% and has an average positive earnings surprise of 8.3% in the trailing four quarters.

More Stock News: Tech Opportunity Worth $386 Billion in 2017

From driverless cars to artificial intelligence, we've seen an unsurpassed growth of high-tech products in recent months. Yesterday's science-fiction is becoming today's reality. Despite all the innovation, there is a single component no tech company can survive without. Demand for this critical device will reach $387 billion this year alone, and it's likely to grow even faster in the future.

Zacks has released a brand-new Special Report to help you take advantage of this exciting investment opportunity.  Most importantly, it reveals 4 stocks with massive profit potential. See these stocks now>>