Avon Jumps After Its Slimmed-Down Operations Top Estimates

  • Cosmetics giant split off its North American business in March
  • Foreign-currency pressure has been easing, Avon CEO says

Avon Products Inc. soared the most in more than five months after second-quarter profit topped analysts’ estimates, helped by cost cuts and improving sales.

Profit was 7 cents per share, excluding some items, the company said in a statement Tuesday. Analysts had estimated 3 cents on average, according to data compiled by Bloomberg.

The cosmetics giant is showing signs of recovery after a sales slump prompted it to split off its North American business in March. That’s let the New York-based company focus purely on overseas markets, where its model of door-to-door sales representatives may have more promise. Avon also embarked on a cost-cutting plan that includes eliminating about 2,500 jobs and moving its head office to the U.K.

“Our performance improvements were broad-base, with nine of our top 10 markets growing in local currency,” Chief Executive Officer Sheri McCoy said in the statement. “We continue to make steady progress on a number of fronts: improving pricing discipline; driving additional cost out of the business; and, continuing to build our brand and enhance the representative experience.”

Avon soared as much as 21 percent to $5.04 after the results were released, marking the biggest intraday jump since Feb. 12. Before the rally, the shares were up 2.7 percent this year.

Brexit Effect

Avon has said that Britain’s decision to leave the European Union -- the so-called Brexit vote -- won’t change management’s plan to move its headquarters to the U.K. The company still expects to complete the relocation by the end of the year.

Even with the planned move, Avon’s exposure to Brexit is low, McCoy said on a conference call. The company’s biggest market is Latin America, with a relatively small percentage of its business conducted in pounds or euros. It’s too early to predict the long-term impact that the U.K.’s European exit might have on business, she said.

“There will be some level of consumer anxiety that can result in economic disruption,” McCoy said. “I’m confident the U.K. team will be able to manage through the current environment.”

The executive expects to see flat to slightly positive revenue growth for the U.K. business by the year-end, though currency headwinds will continue to take a toll.

Currency Woes

Avon saw some modest easing in foreign-currency pressure last quarter, McCoy said. The advance of the U.S. dollar against other currencies had previously eroded the value of Avon’s sales overseas. The company also faced headaches in Venezuela, where the inability to exchange the local currency forced the company to split off that business and write down its assets.

In March, Avon offloaded its domestic operations in a deal with private equity firm Cerberus Capital Management. Cerberus acquired majority control of the North American business, letting Avon shift its focus internationally.

There are signs that the company’s sales performance is starting to improve, but Avon remains a “troubled business,” Hakon Helgesen, an analyst at research company Conlumino, said in a report Tuesday. It has still lost money over the course of the first half.

“While Avon is starting to make some progress in terms of sales, this is nowhere near enough,” Helgesen said. “There is much more work to be done -- on both costs and sales -- before the economics of the business are stabilized.”

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