By Amy Tsao
When Avon Products reports earnings after the market closes on Oct. 29, analysts expect few surprises. Way back on Sept. 8, New York-based Avon (AVP ) CEO Andrea Jung told Wall Street what earnings for the third quarter ending Sept. 30 would look like: pretty, but not beautiful. Earnings per share are expected to be 34 cents, up 22% from a year-ago's 28 cents. Revenues should climb 11%, to $1.8 billion.
Avon's guidance doesn't depart much from previous projections, and it's still one of the most richly valued stocks in the household-goods business. Shares are trading at $42, or a p-e ratio of 21 for 2005. That's a significant premium to its peer group. It's also a slightly higher valuation than the broad S&P 500-stock index.
However, the direct-marketing cosmetics giant's projections did raise some eyebrows. That's because it said third-quarter earnings from operations in North America would slip by 5% to 10% due to slack sales. On the brighter side, a better-than-expected rise in profits from Avon's fast-growing international operations would well offset the contraction. "The simplest way to think of this is to picture a seesaw of emerging markets on one side and North America on the other," says Jim Dorment, household-products analyst at US Trust.
"VERY EARLY DAYS."
Foreign markets have been Avon's growth engine for some time now. Sales in Europe in the third quarter are expected to jump by 30%, Avon says. Dorment expects that pace to continue in international markets for the next several years. Markets such as Russia and Vietnam continue to be strong with "significant further opportunities," Dorment says. "They're still in the very early days in creating presence in those markets."
The trouble is in that the slow-growing U.S. and Canada represent Avon's biggest markets. That makes North America Avon's "anchor," Dorment adds. Investors don't expect a whole lot of growth from the region, but they do frown on softness, because sales increases in emerging markets are fast, but also less reliable.
The biggest issue for Avon is whether weakness in North America will continue into the fourth quarter, its most important period. Avon will discuss quarterly results with analysts on Oct. 29, and will probably point out that it's preparing to launch several new product lines in its home market, including a new lipstick line, Anew Clinical (a Botox substitute), a catalog of men's products, and a new fragrance. Analysts will likely probe for details about the success of marketing efforts for these new products.
UPSIDE IN CHINA.
Jennifer Chien, an analyst at PNC Advisors, says she'll be focused on the direction of profit margins. Large consumer-product companies have seen depressed margins in recent quarters because of rising raw materials costs. Some companies in the category have met revenue expectations, but only by increasing promotion and marketing spending. "I want to see how they're dealing with that," Chien says.
Certainly, at least one very bright spot is on the horizon: Avon's China business could get a major boost starting in 2005. Chinese regulators will soon introduce legislation that could legalize the direct selling for which Avon is famous. (It can now sell its wares only at kiosks in China.) "That would be a huge opportunity. It's all upside for them," says Dorment.
Avon is undoubtedly a handsome investment for those who want some personal-care shares in their portfolio. But the recent slowdown in the U.S. is a blemish on its record, one that management must prove it can remove with its new products.
Tsao is a reporter for BusinessWeek Online in New York
Edited by Thane Peterson